(Olympic) gold and stock market returns

As the Olympic flame approaches Paris, you’ll be interested to know there is a correlation between Olympic Gold medals won and the stock market performance of a country.

Many of you will remember the London 2012 Olympics, a record year for Team GB! We took home 67 medals, 29 of which shimmered with Gold, whilst the FTSE 250 (ex-investment Trust) returned a remarkable 28.7% over the year, compared to the FTSE All World’s 12% return¹.

As a Yorkshire based investment team, we must add that if Yorkshire were on its own we would’ve come 12th in the 2012 Olympics!

Medals

Of course, this relationship is not actually true. What does a country’s Olympic performance all mean for the future of its equity market? Quite frankly, nothing.

In a world full of data, there is such temptation to cherry pick, draw connections, find relationships and patterns where they often just don’t exist. We could draw out a tedious link, create a narrative for such a phenomenon, talking about national morale, pride and celebrations.

And, yes, this may be partially true. For example, we may well see a short-term bump in a country’s hospitality profits, as a country celebrates. But it’s unlikely to be anything structural in the years ahead. We shouldn’t create casual links between two things, just because a spurious pattern or a good story exists.

As we move back into reality, sadly, the things that tend to matter aren’t as glamourous as Olympic success.

But UK equities do benefit from the podium finishing qualities of falling inflation, interest rate cuts and a stable political backdrop.

Podium

UK equities do benefit from the podium finishing medal winning qualities of falling inflation, interest rate cuts and a stable political backdrop.

So sticking with Gold(s)*, the Bank of England (BOE) is critical in the UK economy, utilising its monetary policy tools to meet its objective of maintaining monetary and financial stability.

*The Bank of England are responsible for the UK’s gold reserve. Now, what did I say about creating tedious links where they don’t exist…?

It’s less shimmery than a medal, but let’s talk about central bank rate cuts. Particularly, the historic link between BOE rate cuts and a multi-year period of outperformance for mid-cap stocks.

Looking at data over the last 30 years, the asset class tends to outperform the broader market following cuts over one, three and five-year periods.

FTSE 250 returns after UK Interest rate cuts (%)

FTSE 250 returns after UK Interest rate cuts

Source: Martin Currie and Bloomberg as of 31 May 2024. Data is month end index for the month when UK interest rates were first cut. Date range analysed is 1990- 2024 (seven rate cut periods).

Here, the correlation makes sense as rate cuts are a stimulant to growth in an economy and disproportionately benefit the more domestically focused parts of the market, notably mid-cap stocks. This is a relationship that isn’t by chance, rather is one backed by reason, and we anticipate it will repeat itself.

The BOE is anticipated to begin cutting rates in the second half of the year. UK equity markets have already started to recover, with a buoyant nine months behind us. Yet it appears we are not long off the starting blocks. Rate cuts are combined with a new stable political backdrop, rapidly falling inflation and backed by an economy that is primed to rebound.

Moreover, the last nine month’s returns are from historic lows with UK equity valuations remain depressed on any long-term metric. History would suggest mid-cap stocks can continue to punch above their weight in the years to come. Now is certainly a good time to take a second look at the opportunity in front of us.

We would like to wish team GB good luck for the 2024 Paris Olympics (but we also know it’s not needed for excellent years ahead for the UK stock market!)

Sources

¹Morningstar as at 31 December 2021.

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