The tension in Europe is unbearable. Everyone is afraid of the outcome amid scandal, upset and intrigue. This week, after months of summits, meetings and planning — it’s finally going down. We are, of course, talking about the 2012 European Championship.
With so much at stake, it’s only natural that bank analysts have a thing or two to say (because they’re the true football experts, obviously).
So who will win? With so much money being bet trying to predict the winner, UniCredit thought it prudent to help you with a handsome, little forecasting model. It’s based on the players’ aggregated market value:
“Money scoring goals” means that a national team’s strength is best reflected by the market values of its individual players. Assume that a player’s transfer between two clubs takes place. The higher the price paid for a player, the greater his abilities on the football field are deemed to be. Economists’ “iron” law of supply and demand can therefore also be applied to the football transfer market.
Football is a huge market with quite a lot of volume, thus rendering it useful for forecasts:
Total transfer turnover (sales plus purchases) in both the English Premier League and the Italian Serie A was more than EUR 1,000mn last season. This compares to about EUR 700mn in the Spanish Primera Divisón and EUR 400mn in the German Erste Bundesliga. From an economist’s perspective, the transfer market is therefore a deep and liquid one, reliably reflecting the forces of supply and demand.
UniCredit analyst Andreas Rees is therefore comfortable using it as a metric.
One funny thing to note is net transfer sales, by football league and hence country, which effectively is football’s current account. Some of the usual suspects are net exporters: the Netherlands, Sweden, and Denmark all make more money selling players than they spend on buying them.
However, it is worth noting three countries’ positions: Greece, Portugal, and Germany. While Greece (€6m) and Portugal (€12m) are net exporters, Germany is a net importer (€5m). Those over-spending Germans…
Back to the championship. Based on market value, who will win? That’s easy: Spain. By far. Not only is Spain the most valuable team overall, the team is homogeneous too. It possess the most valuable goalkeeper, best defenders, and midfielders. Only England and Portugal have more valuable forwards (thanks to Rooney and Ronaldo) than Spain — and, Spain might decide to go with a team made solely of midfielders anyway so that may be moot.
Based on this analysis and the composition of the groups, the semi-finals will be two classics: Portugal versus Spain and Germany versus England. The final will Spain versus Germany.*
Obviously, only looking at aggregate market values can be risky, especially if the total market value of the team is based on one player. This is most notable with Sweden (Ibrahimovic), Portugal (Ronaldo), and Croatia (Modric). Those three teams lose the most if their top player was to get injured, play badly, etc.
Another way to look at the risk-profile for each country is to take the standard deviation (“risk”) and average market value (“return”) and plot with a regression:
To obtain a statistically more sophisticated risk measure, we additionally calculated standard deviations of individual players’ market values within each team. In line with classic portfolio theory, this was then expressed in relation to the return (see chart 6). The latter is equivalent to the average market value of a team (per player). Finally, a regression between both variables is estimated. All teams markedly situated above the regression line show an above-average risk-return ratio. These “high betas” are Portugal, the Netherlands, Croatia and Sweden.
Of course, football is also based on teamwork, luck, momentum, tactics, home advantage, referees, randomness, and bubbles (clubs paying above fair value price because of rich owners), so this might not be valid (remember, Greece won in 2004). All of which might be worth considering before placing your bets on Ireland…**
Full note in the usual place.
* FT Alphaville has, through a source, received the latest message between the German Chancellor and the Spanish PM (the Germans… is there anything they won’t leak?):
“Listen Rajoy, you make sure Torres misses this and Bankia is sorted. Kisses, Angie”
Which we think betrays a double whammy of massive optimisim: that Bankia will be the prime problem come final day, and that Torres will get to take a penalty.
** The disparaging reference to Ireland’s chances was included despite the objections of some FT Alphavillains who believe UniCredit must be pushing an agenda. Ireland for Euro 2012!
Bored of the eurozone crisis? FT Alphaville