32Investing in emerging markets|Special edition Investing in emerging markets|Special editionInvesting in emerging markets Special edition Authors Jrme Audran Michael Bolliger Tilmann Kolb Jorge Mariscal Quentin Pilloud Editor in Chief Tilmann Kolb Editors Russell Comer Project management Corinne Fedier Design and publishing Michael Galliker Werner Kuonen Margrit Oppliger Communication Fabian Gmuender Irene Milisenna Special thanks We would like to thank VanessaMaldonado and Daniel Alexeev fortheir valuable inputs and importantcontributions. Cover picture Gettyimages This report has been prepared byUBS AG, UBS Financial Services Inc.(UBS FS), and UBS Switzerland AG. Please see important disclaimer atthe end of the document. 4 The most exciting eventof the year 7 Some surprising factsabout Russia 10 What investors canlearn from successfulfootball teams12 More than goalsand feelings 16 And the winner is… 22 Investing in Russia 30 Disclaimer Contents Dear reader, Every four years, the world displaysgreat emotion as the beautiful gamecaptivates audiences around the globefor an entire month. Russia will hostthis year’s football World Cup, where,on 14 June a whistle at Luznhiki Sta- dium in Moscow will mark the start ofthe tournament. Visitors will have farmore to marvel at than just the world’stop footballers – Russia has a rich his- tory, diverse culture, and majestic land- scapes.Unfortunately, Russia has been in focusin recent months not only because ofthe upcoming festivities, but also dueto its deteriorating relations with theWest. This includes the introduction ofadditional sanctions by the US, whichhas weighed on Russian assets. But the upcoming tournament mayserve to showcase the country and itspeople, over and above political difer- ences. A laid-back and friendly atmo- sphere during the World Cup, cheeringtogether in a stadium or at a publicviewing, and celebrating the victorswhile respecting the vanquished oferample opportunity to get to knowother cultures. We experience this faceof the Russian nation daily through ourinteractions with our Russian clients. For all of football’s passion, gettingcarried away by emotion is not a soundformula when investing, though. Inthis report, our Chief Investment Offcecombines its excitement for the gamewith a (recommended) cool-headedapproach to investing. It takes a closerlook at the economic impact of thetournament on the host country, someof the challenges Russia faces, andwhere it sees opportunities for globalinvestors to seek exposure to Russianassets. And as is customary by now,the CIO also takes a shot at predictingthe winner of the tournament. I hope that you fnd this paper not onlyfun and enjoyable to read, but alsovaluable for your investment decisions.Christine Novakovic Head Europe, Middle East & Africa UBS Global Wealth Management Investing and footballInvesting and football 54Investing in emerging markets|Special edition Investing in emerging markets|Special editionThe most excitingevent of the year With just a few weeks lefuntilthe opening game, it’stime again to start talkingabout what many considerthemost exciting event of theyear: The World Cup. This time, the tournament will takeplace in Russia. The opening game isscheduled for 14 June in the LuzhnikiStadium in Moscow. Russia’s Sbornayawill meet the Falcons from Saudi Arabia. Looking at their rankings, this might not be the highest standingpairing of the tournament. We areabsolutely sure, however, that thegame will be followed with greatexcitement across the globe and thatboth teams will play with passion andgrit for the frst victory. And the winner is… As always, the tournament is anopportunity to tweak some of themodeling techniques we use in ourdaily work to the art of predicting theoutcome of the competition. We arehumble enough not to outright claimthat Germany will win the tournamentagain, but our simulations indicatethere is no other team with higherodds to lif the trophy than the defend- ing champion. The list of likely con- tenders for the title is long, however.Besides Brazil and Spain, it includesEngland, France, and Argentina. Andwith Belgium, we even see a moderatepossibility that a team might succeedwhich has not won the competitionbefore. We could even see Brazil faceits nemesis from 2014, Germany. Whilewe hope that the best team wins, wealso hope that the outcome is less dev- astating than last time, when our col- leagues in So Paulo were depressedfor several weeks aferwards. Emerging hosts Afer South Africa and Brazil, Russiawill be the third emerging nation tohost the tournament. If we add Qatarto the list, the host in 2022, the ques- tion can be asked whether great soccernations such as Germany, France, England, Italy, or Spain have becometired of hosting the tournament, lessappealing as hosts, or, whether theysimply have run out of money to treatthemselves to the luxury of such acostly endeavor.The reality is probably more complex,but it likely includes the above argu- ments.With 28 UNESCO World Heritage Sites,amazing natural diversity, and a richcultural heritage, Russia has a lot toofer tourists. Yet, it attracts fewer visitors than smaller countries such asMalaysia, Turkey, or Mexico, not tomention tourist powerhouses such asFrance, Italy or Spain. Moreover, thebeneft from investments in infrastruc- ture should be higher in Russia thaninmany European countries. The esti- mated spending of USD 12 billion,abit less than 1% of GDP, might havea higher investment return in Russiathanin Spain, Italy, or France. Still,wedoubt that it will boost RussianGDP signifcantly in the longer term.Moreover, Russia can aford its role asa host with ease. Looking at publicfnances in the most football-savvynations on each continent (Fig.1), itshouldn’t be too big a surprise thatseveral developed nations might shyaway from the extra spending involvedin becoming a host nation. Instead,countries like Saudi Arabia, Nigeria, orPeru seem to have a lot more fscal lee- way to host upcoming tournaments. Not without internationalcontroversies That said, Russia’s role as a host nationhas resulted in signifcant controversy.Sau di A rab ia Rus sia Nig eriaPeruChileKorea Au stra lia Me xicoQata r Mo roc co Arg ent ina Ge rm any Tun isiaBrazilUK Fra nceSpainUSEgyp t Bel giu m Por tug al Jap an 120 80 0 40 140 100 20 60 Can your country’s publicnances aord the luxury of being a hostPublic debt, in % of GDP Source: Fitch, UBS, as of April 2018 Emerging marketsDeveloped marketsCurrent and future host nations Fig. 1 234 Investing and footballInvesting and football 76Investing in emerging markets|Special edition Investing in emerging markets|Special editionFor a start, the naming of Russia andQatar as host nations for 2018 and2022 respectively, triggered severalinvestigations, and ended in a wide- ranging crackdown on corruption inthe sport. Although several senior offcials have been banned from foot- ball, many feel that the tournament isstill tinged with controversy. And thenthere is Russia’s involvement in Syria,the accusation of meddling in foreignnations’ democratic elections, interna- tional sanctions against the country,and the confict in Crimea. Tensionbetween Russia and the West has beenrising for a while, and it is going to bediffcult to de-escalate the situation inour view. We hope, though, that thethe countries will use the tournamentas an opportunity to build bridges. Thiswould evoke the ancient Greek tradi- tion of pausing all warfare during theOlympic games. We structured this report as follows:We frst present some interesting factsand fgures about Russia, a countrythat has a lot more to ofer than manythink. Next, we look at the takeawaysfrom successful soccer teams for inves- tors in section 3. In section 4, we sharesome more thoughts on why it ismainly emerging countries that seemto be willing and able to act as hostnation, and whether it really pays offor Russia to play host to such a majorsporting tournament. Section5 takes