With the Summer Olympics beginning tomorrow, it’s time to bust out the American Flag paraphernalia and get ready to root for your favorite athletes. Sadly, if you’ve been watching the news you know that this year’s games are threatened with unparalleled uncertainty. From civil unrest to the Zika virus, these Olympics are already facing sharp adversity.
While that won’t keep us from trying to enjoy the games, savvy investors are always sizing up ways that global events will affect their earnings.
If you want to gauge how the Olympics will impact Brazil directly, a good starting place would be the 2014 World Cup. An event similar in scale both in Brazil’s investments and returns, the World Cup painted a bleak picture.
Brazil was barely able to complete enough construction for the event to transpire, and it was marred by protests and elevated crime. While the massive increase in tourism boosted the economy in 2014, 2015 saw losses that far exceeded the short-term gains. Ultimately, the impact was a short-term economic bubble, and when it burst it left the whole country hurting.
Of course, you can argue that Brazil can learn from their mistakes, and the Olympics are not the World Cup. So far, the same mistakes have been made in preparation for the Rio Games as were made two years ago.
More to the point, the Olympics have a history of being economically detrimental to host countries. Since 2000, every host has seen a similar bubble effect and declined after the games concluded.
The fact that the games are relegated to a single city prevented a similar loss for the U.S. in 1996, but when you consider that the games are expected to boost Brazil’s total tourism by as much as 10 percent this year, it’s easy to see that any bubble effect will have national consequences. That leads to the next big question. How will it affect us at home?
Since the turn of the century, Brazil has boomed as both a global economic partner and a major source of trade with the United States. Today, they represent a two-way trade of well over $80 billion.
Their major imports from the U.S. are machinery, optical and medical instruments, and services. Major exports to the U.S. are agriculture, iron and steel, mineral fuels and aircraft. If we use the World Cup analysis again, it shows that trade was boosted in 2014 but dropped sharply in 2015.
Combining the two years, overall losses were roughly $15 billion, which is a 25 percent drop in combined trade. If the trend repeats, 2016 will see an increase in trade followed by another devastating loss next year.
While these trade numbers are certainly bad, especially for the listed industries, it still won’t make a big difference to investors in the U.S. Agriculture trade didn’t see any significant drops this year, and it will likely hold steady regardless of anything that happens at the Olympics.
So, unless you are directly investing in Brazil, the sad impact of the Olympics won’t affect your portfolio by any noticeable change. Reducing your holdings in the major exports to Brazil might be a safe approach, but if you’re properly diversified it won’t be necessary.
There’s another way the Olympics impact the U.S. economy. Significant investments are made every two years in sponsorships and advertising during the games. Summer Olympics spending is usually larger than winter, so we can expect a large influx of spending this summer.
In fact, estimates suggest that the Olympics alone will lead to a 5.1 percent increase in advertising for the year. That equates to $192 billion in total spending.
It won’t equate to percent changes in any industry, but the extra spending can mildly accelerate the slow but steady economic improvement and help stave off any stagnation that would scare investors who are finally starting to feel a little less afraid and more adventurous.
In summary, the Olympics will provide a short boon for Brazil followed by steep losses. Here in the U.S., we’ll barely feel those effects, and ultimately the increased spending this summer will help sustain economic growth.
Regards,
Ethan Warrick
Editor
Wealth Authority
