wealth management research 21 april 2006 ubs …ssouhlal/stuff/ubsworldcup.pdfubs investor’s guide...

UBS investor’s guideWealth Management Research 21 April 2006

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Special editionFootball World Cup 2006

Economists’ viewAnd the world champion is…

The 11 performersOur World Cup equity team

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UBS investor’s guide special edition April 2006 3

Editorial

Yours, Klaus W. Wellershoff

Dear Readers,

Thank goodness it’s just seven weeks untilthe FIFA World Cup kicks off. I don’t knowhow things are with you, but World Cupfever is starting to reach a climax at theWellershoff family home. There’s hardly anevening meal that goes by where we don’tdiscuss whether Cissé is from the IvoryCoast or from France, whether Buffon orCasillas is the best goalie, or whether theBrazilians will make it to the final again.Four sons and one dad – my poor wife.

The whole thing was set in motion by theinevitable appearance of World Cup collec-tors’ cards. By the way, this is also an inter-esting economic phenomenon and I wasable to hold an almost philosophical discus-sion on the terms “value” and “price” withmy 12-year-old. What is the value of a foot-ball card with Ronaldinho on it? Packetprice divided by the number of cards perpack? The ten-year-old even wanted to tryusing arbitrage. In Appenzell five cards cost80 centimes, in Zurich they cost 90.

While my sons are busy collecting diver-sified portfolios of football cards, we onceagain dedicate ourselves to more seriousissues – in this case, our profession asforecasters. In his focus article, in this spe-cial World Cup edition of the “UBS in-vestor’s guide”, Andreas Höfert attemptsto use statistical methods to determinethe outcome of the tournament. His pre-diction: Italy will lift the FIFA World Cup.We are on the edge of our seats waitingto see whether the otherwise accuratehead of our economics team has over-done it this time.

We will be checking statistical regularitieson the stock and capital markets of emerg-ing countries even more rigorously. It’sworth noting that defeats have a negativeeffect on the markets while victories makeno difference at all. It seems a bit of a shamewhen you think about it if you consider that31 of the 32 participating countries willhave lost by the end of the tournament. Os-car Andreu is somewhat more optimistic inthis respect: in his article he presents his topeleven – eleven shares that stand to bene-fit from the FIFA World Cup over the courseof the next few months.

Have fun reading a not-entirely-seriousspecial World Cup edition of the “UBS investor’s guide”!

Contents

21 April 2006

Editorial 3

Economists’ view 4

Country reports 12

Recommendations 34

Disclosures 42

Impressum 43

As the climax of thatmost beautiful game,the FIFA World Cupwill cast its spell onfans around theplanet and show justwhat globalisation

means. Bankers like to score goals too – with impro-vised means, as in the cover picture, or, more likely,with professional methods to help them draw upinvestment strategies and concrete recommendations.

Details regarding the information contained in this publication, restrictions on distribution and other legal consid-erations are given on pages 42 and 43.

In all cases we advise anyone interested in selling or buying a product or financial market instrument mentionedin this publication to consult their client advisor first.

Price information for more than 600,000 financial market instruments is available at www.ubs.com/quotes.

Photo: Matthias Tunger/primsa

You will find a comprehensive glossary of technical terms on the internet sitewww.ubs.com/1/e/about/bterms.html

UBS investor’s guide special edition April 2006 54 UBS investor’s guide special edition April 2006

Economists’ view Economists’ view

And the world champion is...

The question of who will be the next world champion is a topic of endless dis-cussion among the countless fans of that “most beautiful game”, football (or“soccer”, if you will). Trading at betting shops is booming, and if you take theirfigures as a benchmark of the economic risk people are prepared to take, thenBrazil will beat England, Germany and Argentina into the top slot. Italy andFrance are hot tips according to those in the know.

«Economic analysis: neat tools applied to dirty data,Sport analysis: dirty tools applied to neat data.»

Anonymous, 2006

Interestinglyenough, this fore-cast does not matchup with FIFA’s rank-ings. Brazil is unde-niably the worldnumber 1, the num-ber 2 spot is how-ever occupied bythe Czech Republic,

ranked a respectable tenth by bettingshops. FIFA’s number 3 rank is held byParaguay, which occupies positions 19 to23 if you follow the betting shop system.England is ninth in this world ranking andGermany… well, according to the FIFA listthey are going to have a tough time get-ting through to the last sixteen. We, all ofus self-proclaimed football experts, aren’tquite at ease with the FIFA rankings. Wewould rather place our trust in the bettingshops. As the internet’s betting shops arealmost entirely British, England has a cer-tain “home bias” and a somewhat high-

er rating than perhaps deserved. From a subjective point of view we consider the fact that Brazil, Germany, Argentina,and Italy hold the top spots to be largelyrational, despite the miserable perform-ance of some of these teams. But is thisalso justified? To be able to answer thisquestion positively, we need to draw onstatistics and econometrics to provide uswith a possible FIFA World Cup scenario.

An exclusive clubFIFA World Cup winners make up a fairlyexclusive club. While 2006 will see thehosting of the 18th FIFA World Cup, so faronly seven countries have succeeded inlifting the cup. Three of which (Brazil, Ger-many and Italy) make up two thirds of allWorld Cup titleholders, and five (the pre-vious three plus Argentina and Uruguay)almost 90%. Semi-finalists are also in aclass of their own: 24 countries have sofar managed to grab at least one of the68 semi-final places on offer, with three of

the above countries (Brazil, Germany andItaly) occupying 40% of all slots, and sev-en countries (the previous three plus Ar-gentina, France, Sweden and Uruguay) sofar taking up two thirds of all places in thepenultimate round.

It is of course a great privilege to be ableto take part in such a tournament. Seven-ty-five national squads have so far man-aged to make history by winning the 361World Cup places. This is not as many asit seems though, as FIFA now has a mem-bership of more than 205 national teams.A small elite has also arisen among partic-ipants in the FIFA World Cup. Brazil, Ger-many and Italy have managed to secure13.9% (of a maximum 14.9%) of all start-ing places. Ten teams have snapped up40% of all allocated places, and 25 some75%.

Home turf often helpsBased on this assumption, not every coun-try has the same chance of winning theWorld Cup – some have definite advan-tages. What’s more, the home team hasone definite advantage. Six of the seven-teen FIFA World Cup titles so far havebeen won by the host country. If everyparticipating team were to have the samechance, then the statistical likelihood ofthe host team winning would be a mere0.0011% of all possible cases, an irrele-vant result if you allocate every host teama prior probability of 33% of winning“their” World Cup. The home advantagetherefore gives Germany a definite edgein the competition.

A similar phenomenon is evident whenconsidering the continent of the winningteam. The traditional duel of Latin Amer-ica against Europe, played out since 1930,is most probably set to continue into itseighteenth round at this year’s FIFA WorldCup. The Latin American nations are cur-rently 9:8 ahead, with all FIFA World Cupsever held there won by one or other ofthem. European teams have so far woneight of the nine FIFA World Cup tourna-ments held in Europe. Brazil has won oncein Europe (1958 in Sweden) and has alsowon the two FIFA World Cups held in“neutral territory” (1994 in the USA and2002 in Japan/South Korea). We havetherefore awarded a “Brazil bonus” in thefinal rounds.

The economy hardly plays its partIn view of the sporting variables in force,no one socio-economic factor can be pin-pointed in favour of one team winning.We have calculated various estimatesfrom demographic data (population sizeto indicate the potential talent pool, aver-age age of population, number of urbandwellers as a percentage of the total, birthrate etc.) and macroeconomic variables(GDP per capita, average growth in thelast five years, inflation, unemploymentrate etc.), with the result that neither onenor the other of the variables has a par-ticularly noticeable effect on the result.This shouldn’t really come as a surprise asit would be hard to identify a common socio-economic denominator for Brazil,Germany and Italy. Unfortunately, it is notpossible to directly quantify the degree of“football craziness” in these countries.

Andreas Höfert



Football yesterday and todayAs proposed above, an exclusive club ofteams has formed as a result of the FIFAWorld Cup. This is not only subjectivelyevident; it also serves as a useful statisti-cal tool. Two variables are relevant in al-most all simulations: the number of FIFAWorld Cup participants and the numberof qualifications for the semi-final.

These “historic” variables are joined bytwo of more recent origin. The first is thenumber of outstanding players in a team.We didn’t of course calculate this variableourselves, but left it to a seasoned expertby the name of Pelé. In 2004 he publishedhis own list of the 120 best living foot-baller players. And 30 of these stars willbe lining up at this year’s FIFA World Cup.The second variable was the “Elo rating”of the teams in the March before each FI-FA World Cup. In contrast with the FIFAranking, which does not weight theteams’ wins and losses, the Elo rating –named after the US-Hungarian physicistand chess player Arpad Elo – is used to as-sess chess masters and works on the prin-ciple that winning against Brazil is agreater achievement than beating Andor-ra, a home victory is worth less than anaway win, an 8:0 win is worth more thana 1:0 victory, and qualifying for the WorldCup counts more than a friendly match. With the aid of a Probit model (an esti-mate used to express the probability of anevent actually happening), the game planof the FIFA World Cup was determined by specifying and assessing a new modelfor each round. For the first round (play-ing for the last 16 places) and the quar-terfinals, the data of all FIFA World Cups

held since 1986 were included. For quali-fication for the semi-finals and finals as well as for the winner, the data of allFIFA World Cups held since 1970 were in-cluded. Besides the probability deter-mined by the model, the results of directencounters involving the 16 finalists in the last ten years were also taken into ac-count. We gave this factor one third of theweighting, and the results of the modeltwo thirds.

Let’s start with the first roundTable 1 lists the teams that have made itthrough the first round as well as all qual-ification probabilities and the five hot out-siders. Groups C (the “group of death”),D, E and G will be particularly interesting.Our model has worked successfully for be-tween 13 and 15 of the last 16 from theprevious five World Cups. The biggest sur-prises for the model to date were France’searly exit in 2002 and Spain’s in 1998, andthe successes of Costa Rica andCameroon in 1990 and Morocco in 1986in making it to the last 16.

Sudden deathFor the 16 teams that survive the pre-liminary round, we have taken calculatedprobabilities from the preliminary roundto ascertain who will win or come secondin their group. Brazil, Spain, France andaccording to the model, Germany aremore or less certain to go through. Due to their varying strengths, this procedureis not as conclusive for teams in the oth-er groups. Table 2 shows how the FIFAWorld Cup will continue after the firstround.

• Our model has correctly predicted 70%of the winners of all quarter finalmatches of the previous five FIFA WorldCups; 17.5% of other games were inthe range of inexactitude, i.e. the rela-tive probability for the winner was be-tween 45% and 55%. Only 12.5% ofthe matches were incorrectly predicted.The greatest upsets for our model werethe qualification of South Korea againstItaly in 2002, which was astoundingeven when taking the home advantageinto account, Senegal’s win over Swe-den in 2002, and Romania’s victoryagainst Argentina in 1994. Accordingto our simulation, in 2006 only the “tra-ditional” teams, i. e. six of the sevenprevious world champions (history mat-ters!) along with Holland and Spain, willmake it through to the exclusive last 16.

• Our method has correctly forecast 65%of all winners of the quarter finalmatches for the previous five WorldCups. A further 10% were in the rangeof inexactitude, and 25% of resultswere incorrectly predicted. The largesterrors produced by the model (and thusgreatest performance of the winningteams) were the victory of Bulgariaagainst Germany in 1994, and Croatiaagainst Germany in 2002, along withBrazil’s ouster by France in 1986. As aresult of this, the quarter finalists thatwill make the semi-finals are the mostdifficult to forecast. Only a win for Brazilagainst Spain seems to be a foregoneconclusion at this year’s FIFA WorldCup. Germany-Argentina, Italy-Franceand Holland-England also appear todemonstrate similar predicted probabil-

ities. We will however back the teamswith the marginally higher probability,in this case Germany, France and Eng-land.

• Our method has correctly predicted89% of all semi-final winners from thelast nine FIFA World Cups. Only Argenti-na’s win over Italy to reach the final in1990 has to be recorded as an error bythe model. It is however much easier topredict the finalists than the semi-final-ists. If we’ve been right up until now(which probably isn’t true), then Brazilwill beat Holland and Italy will winagainst Argentina.

• Brazil or Italy? The Europeans and theLatin Americans have faced each othertwice (in 1970 and 1994) in the final.However, our probability model speaksin favour of the Italians. Brazil is the on-ly team to have won FIFA World Cupsoutside its home continent, but thespecial “Brazil factor” easily tops thehome-continent factor. So this meansItaly will be world champions.

But wait a minute! How certain is such aforecast at the end of the day? When wefollow Italy’s route back to the first round,they only have a 9% chance of winningthe FIFA World Cup. This is in fact threetimes more than 1/32, but it’s still verylow. This is of course where the charm ofthe tournament lies. To win the title re-mains an infrequent event full of excite-ment. At the end of the day, the Greekscan teach us a thing or two – and not theirphilosophers, but their football players,who succeeded in winning the European



1st round and probability to make itto the 2nd round in %

Group AGermany 88Poland 53Costa Rica 32Ecuador 27Group BEngland 74Sweden 66Paraguay 45Trinidad & Tobago 15Group CArgentina 65Netherlands 61Serbia & Mont. 47Ivory Coast 27Group DMexico 76Portugal 61Iran 48Angola 15

Group EItaly 72Czech Republic 63USA 52Ghana 13Group FBrazil 75Croatia 56Japan 36Australia 32Group GFrance 84Switzerland 57Korea Republic 48Togo 11Group HSpain 84Ukraine 56Tunisia 36Saudi Arabia 25

Bold = qualifiedBold orange = hottest outsiderSource: UBS WMR, see page 42

2nd round and probability to win in %

Germany 70Sweden 30

Germany 46Argentina 54

Italy 53France 47

Netherlands 53England 47

Brazil 73Spain 27

Argentina 43Italy 57

Netherlands 22Brazil 78

Italy 54Brazil 46

Argentina 60Portugal 40

Italy 80Croatia 20

France 80Ukraine 20

England 65Poland 35

Netherlands 75Mexico 25

Brazil 70Czech Rep. 30

Spain 70Switzerland 30

Source: UBS WMR, based upon appendix

Championship in 2004 despite being ap-parent no-hopers according to this elabo-rate forecasting [email protected]

10 UBS investor’s guide special edition April 2006 UBS investor’s guide special edition April 2006 11

Group A

Group B

GermanyGermany, for once, is not a real favorite in it’s own world cupPossible ranking: Reaching the quarter finals is possible

Costa RicaThe “Ticos” have already surprised once in 1990.Possible ranking: Passing the first round is not out of reach

PolandNot the marvelous Poland of the 80s, but still a favorite within the groupPossible ranking: Reaching the eighth-finals for certain, after-wards it becomes difficult

EcuadorOn paper the weakest team of the groupPossible ranking: Probably they won’t make it to round 2

EnglandAs usual high expectations. Will the nerves hold this time?Possible ranking: Quarter- or Half-final

ParaguayA serious contender. England and Sweden should pay attention.Possible ranking: Could make it to the second round

Trinidad & TobagoThe Tom Thumb of this year’s World CupPossible ranking: Elimination in the first round

SwedenTraditionally a strong team at the World CupPossible ranking: Surprises in the second round are possible

Group summary Group summary

GDP per capita (PPP, in USD) 30 150

GDP growth (avg. 5 years, in %) 0.7

Inflation (avg. 5 years, in %) 1.5

Population (in millions) 82.5

Median age 41.2

FIFA ranking 22

World Cup participations 15


EcuadorPoland

Country reports Country reports

Germany Costa Rica

Key facts Germany





Median age 26.1

FIFA ranking 25


Key facts Costa Rica





Median age 36.5

FIFA ranking 26


Key facts Poland





Median age 24.0

FIFA ranking 38


Key facts Ecuador

Tables: see page 42 for explanations and sources

After years in the doldrums, economic sentiment in Germany has picked upmarkedly in recent months. Ongoing wagemoderation has boosted price competitive-ness of German manufacturers, allowingthem to take full advantage of robust glob-al demand. Even the consumer sector – the traditional Achilles heel of the Germaneconomy - is showing some timid signs oflife. Consumer sentiment has been risinggradually, albeit from a very low level. Clear-ly, a victory at the World Cup would providea welcome further boost to confidence.With three wins under their belt, Germanycan look back at an impressive World Cuprecord, and the home field advantageshould help them win Group A. Even if a team like Argentina were to prove an insurmountable obstacle for the young Ger-man squad in the quarter finals, an expect-ed 3.5 million football fans should leave a positive imprint on the host nation’s econ-omy this year. [email protected]

For a long time, Ecuador has been famousfor its political instability (with18 differentconstitutions since 1830), its banana and oil exports rather than for its soccer team.However, this year’s participation at theWorld Cup is the second in a row bringingthe country to the 38th position in the Fifa ranking. While the mountainous An-dean part of the country creates infrastruc-tural challenges, the altitude might havehelped the team to remain unbeaten inQuito throughout the qualification cam-paign.

The country adopted the dollar in 2000in the aftermath of a severe economic crisis – establishing a solid anchor for previ-ously soaring inflation. After being absentfrom international financial markets for several years, it successfully placed a newbond last December. Nevertheless, a weakpresident, a shaky political environment,continuous spending pressure and tight liquidity require investors to be prudent. [email protected]

The second-smallest participant in the FIFAWorld Cup™ in terms of population is of-ten underestimated if it is perceived at all.Yet the per capita income of Costa Ricansis higher than in Brazil and even slightlyabove that of Mexico. Costa Rica is tradi-tionally associated with coffee and ba-nanas. These two products now only ac-count for 12% of the nation’s total exportvolume. Now, Costa Rica’s principal exportis microchips, which account for an as-tounding 15% of all exports. The main con-cerns of this Central American economy arehighly unstable public finances and a dol-lar-pegged currency system, which couldslide into crisis at any time, considering the10% inflation rate. Despite this, the coun-try has fairly good prospects, with anticipat-ed growth for 2006 at 4-4.5%.

Even in sporting terms it would be unwiseto underestimate the “Ticos”. In 1990 theymade the first round, beating such teams asSweden and Scotland. So watch out [email protected]

Poland has no interest in a strong Germanfootball team. This is because the Polishteam will compete against the co-favouriteGermany during the World Cup qualifiers.The Polish economy, on the other hand, ishighly dependent on Germany being on topform economically. One percent of invest-ment growth in Germany can boost Polishgross domestic product by around 0.4%,through direct investment of German com-panies in Poland as well as through in-creased demand for Polish export products.So far, Poland has lost nothing, because in-dependent of the results of the FootballWorld Cup, Polish GDP will once again riseby around 5% in 2006. While in 2004,Poland’s entry into the European Uniongenerated momentum for strong growth,the development significantly stagnated inthe past year (+3.2%). During the WorldCup year, the construction and investmentsectors in particular will be attacking on theflank, increasingly supported by privateconsumption, which is gaining groundthanks to falling unemployment. [email protected]


SwedenTrinidad &Tobago

Country reports Country reports

England Paraguay






Median age 39.0

FIFA ranking 9


Key facts England





Median age 20.8

FIFA ranking 33


Key facts Paraguay





Median age 29.4

FIFA ranking 49


Key facts Trinidad & Tobago



Inflation (avg. 5 years, in % 1.6


Median age 40.1

FIFA ranking 16


Key facts Sweden

The two Caribbean islands Trinidad and Tobago form a nation with a population of only 1.3mn people and a strong energysector that accounts for approx. 40% per-cent of GDP and over 80% of exports.While high oil prices are reinforcing Trinidad& Tobago’s balance of payment and con-tributing to a fiscal surplus, it also raises inflationary pressure. Containing inflationremains a future challenge. If real GDPgrowth were an indicator for the perform-ance of the football team, Trinidad & Toba-go would be among the favourites with animpressive average GDP growth rate of7.5% over the last five years. However, onthe football field when confronting long-established and experienced teams and asthe last team to book their ticket to Ger-many and newcomer in the World Cup, theCaribbean team will have to leverage: ontheir renowned Dutch coach Leo Been-hakker and the ex-scorer of the unbeatableManchester United of 1999, Dwight York [email protected]

A World Cup win for England could be use-ful for the whole of the UK. Amazingly,there is statistical substance to the claimthat a World Cup victory enhances the eco-nomic growth of the winning finalist. Is thismerely fortuitous? Is it just that the fouryear gap between World Cup tournamentsis perfectly timed to coincide with the peaksin the business cycle? The link betweengrowth rates and goals is a tenuous one,but there is some appeal in the notion thatthe feel good factor that follows a victoryactually boosts consumer sentiment. What-ever the causality, the UK consumer coulddo with an excuse to feel more positive. Theconsumer-driven recovery that we werepreviously expecting for this year is lookingless vigorous, in spite of a buoyant housingmarket and demand for mortgage equitywithdrawal. It seems as though a deterio-ration in job security lies at the heart of a less confident consumer, making this atrend worth watching more closely. [email protected]

With a per capita income of USD 1150 in2005 and approx. 6.5 million inhabitants,Paraguay is an economic flyweight in theSouth American context. Players on the fi-nancial markets will scarcely be aware ofthe country, unless they are avid meateaters. The agricultural sector generatessome 30% of GNP; in export terms, this fig-ure is even in excess of 75%. In terms ofgrowth, Paraguay and Uruguay brought upthe rear in South America from 2001 to2005. The same cannot, however, be saidof football. Paraguay reached the last 16 atthe 1998 and 2002 FIFA World Cups: a result that many economically heavy-weights can only dream of. But even incyclical terms, 2005 was highly promising.Fiscal consolidation is proceeding with a rising primary government surplus and a stable debt ratio. Paraguay’s ambitionsare not just confined to [email protected]

Were there a European Cup for the besteconomic situation, the Scandinavianswould no doubt be in the final. The expertsat NIER, the Swedish National Institute ofEconomic Research, sum the situation up as follows: “The Swedish economy is cur-rently enjoying a positive spiral of healthygrowth, an improving labour market andlow inflation.” This uniquely unproblemat-ic situation, without parallel in Europe, islikely to continue throughout 2006, withestimated average growth of 3.5% and aforecast rate of inflation significantly be-low 2%.

The chances of success of the tradition-steeped team from the north (it has been aWorld Cup finalist once and a semi-finalistthree times) may not be quite as good as itseconomic situation. Nevertheless, with acestriker Zlatan Ibrahimovic and heartthrobFrederik Ljungberg, there are some soundand attractive arguments in favour of theSwedes coming off [email protected]


Group C

Group D MexicoTraditional team, which is unfortunately always eliminated early onPossible ranking: Elimination in the Eighth-finals

IranFar less exotic than it seems; could surprisePossible ranking: Second round is feasible

AngolaFirst time in the World CupPossible ranking: Chances of making it to the second roundare low

PortugalThe outstanding team of the past ten years is getting olderPossible ranking: Qualification for the second round should bea piece of cake, afterwards it will be more difficult

ArgentinaOne of the favoritesPossible ranking: Could well make it to the final

Serbia & MontenegroUnfortunately in a very strong groupPossible ranking: A qualification for the second round is already an effort

Côte d’IvoireWould be a co-favorite in an easier groupPossible ranking: It will be very difficult to make it throughthe first round

NetherlandsThe other favorite of the tournament in this groupPossible ranking: If it doesn’t run into Brazil in the half, could make it to the final



ArgentinaSerbia &Montenegro NetherlandsCôte d’Ivoire

Country reportsCountry reports



GDP growth (avg. 5 years, in %) –0.1



Median age 18.5

FIFA ranking 32


Key facts Côte d’Ivoire





Median age 39.3

FIFA ranking 3


Key facts Netherlands





Median age 28.9

FIFA ranking 4


Key facts Argentina





Median age 36.5

FIFA ranking 46


Key facts Serbia & Montenegro

As a famous football nation, Argentina’sprospects in this World Cup arguably lookmuch better than the longer term eco-nomic outlook. On the back of very highGDP growth rates over several years run-ning, Argentina has chosen to retain pro-cyclical monetary policy, even in the face ofpersistently high and rising inflation. At thesame time, heavy intervention in the curren-cy markets has succeeded in keeping the Argentine peso at artificially cheap levels ina bid to support its export lead recovery.

The government’s willingness to inter-vene aggressively in the economy is an im-portant cause for concern for the long-termoutlook. For example, coerced price agree-ments and export bans indicate that short-term political objectives are given priorityover allowing market forces to work effi-ciently. While economic activity may remainat elevated levels over the shorter term, thesustainability of the current recovery ap-pears very [email protected]

Serbia and Montenegro has a challengingyear ahead. Next to the preparations for a referendum on the independence ofMontenegro, the political agenda also con-tains the highly sensitive issue of the statusof Kosovo.

Economically, high inflation coupled with a current account deficit at around 10% of GDP will likely force the government to tighten fiscal policy in order to curb domestic demand. Whereas growth hasbeen solid in export-oriented industries, itremains lacklustre in many unrestructuredenterprises. Within this foggy outlook, the performance of the country’s soccerteam shines like a bright star. Undefeatedthroughout the qualifiers, the team is saidto have one of Europe’s strongest defencelines – always good for a positive [email protected]

The Dutch soccer team again enters thistournament as one of the favourites, as it occupies the 3rd position in the FIFA ranking. But its track record would suggestthat it will fail to deliver, again. We candraw a striking parallel with Dutch eco-nomic growth. Despite high expectations,economic growth over the past 5 years has been an underwhelming 0.6% p.a.,only surpassed on the negative side bycountries such as Argentina, Germany andPortugal. The high expectations were dueto a fairly liberal economic policy, but the“Polder model”, or consensual relationshipbetween unions, government and employ-ers was maintained. The resulting high taxrate most probably slowed the economydown. The consensus expectation is, in linewith FIFA’s optimistic ranking of the Dutchsoccer team, for Dutch growth to pick upagain to 2.4% this year, almost matchingthe OECD average of 2.6%[email protected]

Qualifying for the World Cup finals for thefirst time was a huge surprise – after allCameroon, considered to be a far strongercompetitor, was eliminated. In political andeconomic terms, however, the situation remains unsettled. After the failure to holdelections scheduled for October 2005, the UN Security Council felt compelled tointervene: President Laurent Gbagbo wasgranted a one-year extension of office, simultaneously losing the bulk of his exec-utive power to the new Prime MinisterCharles Konan Banny. Considerable efforton the part of the international communi-ty will be required to prevent a widening of the rift between the political camps ofGbagbo and Banny. Positive economic sti-muli are unlikely in the immediate future owing to the strained and hence uncertainpolitical situation. Growth for 2006 is ex-pected to be a mere 1.2%.Felix Brill


Mexico Portugal


Iran Angola






Median age 25

FIFA ranking 7


Key facts Mexico





Median age 23.4

FIFA ranking 19


Key facts Iran





Median age 16.6

FIFA ranking 60


Key facts Angola





Median age 39.4

FIFA ranking 10


Key facts Portugal

Mexican voters head into general electionsin July, and at this stage, there is probablymore consensus on Mexico’s chances ofwinning the World Cup than which partywill emerge as the dominant force. Formerleftist Mexico City mayor and PRD candi-date Lopez Obrador has consistently main-tained a lead over the PAN’s Felipe Calderonand the PRI’s Roberto Madrazo, but there isfar less clarity on what the balance of pow-er in Congress will be.

Mexico’s strong economic institutionshelp mitigate concerns regarding a possibleworsening of the political environment. Inparticular, Mexico’s solid monetary and fiscal policy performance, coupled with its active sovereign liability management, illus-trates the strong strides made in the pastyears. That said, a divisive election outcomewill lower the prospects for structural re-forms in Mexico, raising longer term risks tothe [email protected]

With President Ahmadinajad at the helm, a novice in national politics with no inter-national experience, Iran looks set to be increasingly isolated on the world stage. Unlike most other oil exporting countries,Iran has saved little of the oil revenue wind-fall. Indeed, expenditures have been risingalmost as fast as revenues, as the govern-ment attempts to keep popular discontentat bay.

It is not clear how long current policiescan be sustained. Oil prices cannot contin-ue rising as fast as they have during the lasttwo years. This means that the governmentwill be unable to continue increasing spend-ing. With a very young and rapidly increas-ing labour force, little reform and ananaemic private sector, unemployment willstart increasing, raising political pressure onthe government. Two events can help reduce such pressure in the short term: the political diversion of a showdown withthe international community over nuclearenergy, or the “feel good” factor of a goodperformance in the World Cup. The latterappears less [email protected]

Angola – the second-largest oil-producingnation south of the equator – is not onlybooming in economic terms. World Cupfever has taken hold of the nation’s foot-ball fans. Based on the team that won the2001 African under-20 championships,thus qualifying them for the under-20world championships in Argentina, coachGoncalves has succeeded in putting togeth-er a strong eleven team. In 2005 this en-abled Angola to qualify for the World Cupinstead of favourite Nigeria. In economicterms, the country is currently benefitingfrom the rapid growth of oil production.The IMF estimates that Angola’s economywill grow at an average rate of 18% be-tween 2005 and 2007. However, non-oilsectors are developing only sluggishly, asthe country is still suffering from the after-effects of the long civil war that ended in2002. In addition, the abundant oil rev-enues are easing the pressure on the gov-ernment to rapidly implement plans formore stable and transparent general eco-nomic [email protected]

Taking the qualifying rounds as a bench-mark, Portugal would have to be amongthe favourites. A goal difference of 35:5and 7 points ahead of the second-rankingteam, Slovakia, speaks for itself. Afterreaching the final at the last European Cupplayed at home, the coming tournamentcould be a glorious climax for the “goldengeneration” surrounding Luis Figo. A resultlike this could breathe fresh wind into theeconomy. The second EU deficit proceed-ings within only three years have upped the pressure on the government to sustain-ably consolidate the budget and tackle other urgently needed reforms. Measuresto date have, however, resulted in a spateof public protests. Discontent is bolsteredeven further by the negative trend in thelabour market in recent years. Since there is very little inpetus from exports, Portugal’seconomy is likely to face a hard time follow-ing the path of past sporting successes.Felix Brill


Group E

Group F BrazilComments are superfluousPossible ranking: Final

CroatiaNot as strong as in 1998, but profiting from an easy group, despite Brazil.Possible ranking: Eighth Finals

AustraliaNot much more than just exoticPossible ranking: Won’t make it into the second round

JapanNot playing at home this yearPossible ranking: Brazil and Croatia seem out of reach

ItalyThe underrated favoritePossible ranking: Final

GhanaA priori the weakest team in the groupPossible ranking: Not very likely to make it to the secondround

USAIs becoming stronger with each World CupPossible ranking: Hottest outsider for making it to the secondround

Czech RepublicVery strong team, which could go farPossible ranking: At least in the Eight Final



ItalyCzechRepublic


Ghana USA






Median age 36.1

FIFA ranking 5


Key facts USA





Median age 35.0

FIFA ranking 2


Key facts Czech Republic





Median age 42.3

FIFA ranking 12


Key facts Italy





Median age 19.8

FIFA ranking 50


Key facts Ghana

With zero GDP growth last year, the Italianeconomy has booked a firm slot at the bot-tom end of the Eurozone GDP growthleague table. The external environment isdeveloping favourably and GDP growth isexpected to accelerate to about 1% thisyear, which, compared to an averagegrowth rate of only 0.4% in the past fouryears would seem like quite a brisk pace ofexpansion. The Italian economy is plaguedby structural deficiencies, which have seena constant erosion of global competitive-ness in recent years and it remains to beseen whether the new government can rec-tify the problems. At the World Cup, theItalians will face strong competition inGroup E, but their tough defence and po-tent strike force should secure them a placeon top of their group. Unfortunately, themidfield is the missing piece in the jigsaw,and without more guile and playmaking inthis position, the Azzuris will have a toughtime. They are nevertheless one of [email protected]

The US is a country of superlatives. It is amilitary leader, a political superpower andan economic powerhouse. The US econo-my features strong productivity gains, aflexible labour market, and highly devel-oped capital markets. But as a tenet of eco-nomic theory states: “everything has itsprice”. One price the US pays to be on topof the world economic ladder is a huge cur-rent account deficit of 7% of GDP, coupledwith fading sources of domestic financing.While overall US economic fundamentalsare sound, the lack of domestic savings is a latent risk that in our view will start to takeits toll on growth in 2006. Similar to its eco-nomic prowess, the US has managed tobuild up a world class soccer team (socceris an abbreviation for Association Football,formed in 1863). Its FIFA ranking improvedfrom 28 in 1993 to 5 in 2006. The price topay? For soccer fans, no price is [email protected]

Having won the African Championshipsfour times, Ghana’s qualification for theWorld Cup was long overdue. The successof star striker Michael Essien and his youngteam is attributable to trainer Ratomir Dujkovic’s style, which is founded essential-ly on discipline. Discipline will also be need-ed when it comes implementing the eco-nomic reforms adopted by the government.Thus, the private and agricultural sectorsare to be supported in order to consolidatethe positive economic growth experiencedin recent years. High inflation, on the oth-er hand, is still a major bugbear and onethat is being further aggravated by high oilprices and an expansive fiscal policy. How-ever, in combating inflation, the centralbank faces the problem that it must notcurb credit demand too strongly, so as notto counteract the government’s economicreforms. Felix Brill

There’s no ignoring the ambition of theCzechs: the Czech football team is numbertwo in the FIFA world ranking list, right behind world champion Brazil. The CzechRepublic is not just strong when it comes tofootball, as its key macro-economic dataare not lagging far behind the Footballteam. With a growth rate of more than 6%,the country’s economy also holds a top po-sition in global comparison. A significantcontributing factor was the country’s risingforeign trade. Given the overall acceleratedgrowth in Western Europe, the recent eco-nomic boom is not expected to level off justyet and interest rates are expected to con-tinue to rise. Although the rise in prices hasso far been moderate, the inflationary pres-sure is imminent. This pricing pressure ispartly softened by the strong appreciationpotential of the Czech Koruna (CZK). As theEU continues to converge, the CZK is set toappreciate further. [email protected]


Brazil


Croatia Australia Japan






Median age 26.8

FIFA ranking 1


Key facts Brazil





Median age 40.6

FIFA ranking 19


Key facts Croatia





Median age 36.6

FIFA ranking 44


Key facts Australia



Inflation (avg. 5 years, in %) –0.5


Median age 42.9

FIFA ranking 18


Key facts Japan

Brazil enters the 2006 presidential electioncycle in defensive mode – with local inter-est rates at such high levels that, this timearound, it will be just too expensive to betagainst the currency. Such cautious stanceis in sharp contrast to the strategy theBrazilian National Team will be pursuing inthe 2006 World Cup. There, strikers such asRonaldinho, Ronaldo, Gaúcho, Cacá andAdriano will focus on scoring goals – rele-gating defence strategies to a secondaryrole.

And yet, when dealing with the Brazilianeconomy, playing defensive is good news.Brazil has a dreadful track record of reac-tions to political shocks, with asset pricesoscillating violently during an election cam-paign. Will it be different this time? Wethink so – at least on economic grounds,where we expect asset price volatility to betamed. In football terms, however, Brazilwill keep on playing offensively and will re-main the major contender for the [email protected]

Australia counts among the so-called pri-mary producing countries, despite the factthat it has a diversified economy withstrong industrial and service sectors. Yet the raw-material sector does play a moresubstantial role than in other developed nations. The country is now reaping thebenefits of this position, too, as the de-mand for raw materials has increasedsharply. This is the reason behind Australia’smany years of strong growth figures, andwhy the Reserve Bank of Australia had to put the brakes on the economy as farback as the end of 2003 to stop it fromoverheating. This year all the signals areonce again set to green, and we expectcommensurate growth. The World Cup isnot likely to inspire tremendous interestDown Under, even though the country is fielding a team for the first time in a longtime. Football is not one of the most popu-lar sports in Australia. Thus, Aussie “soc-cer” fans are likely to be more enthusiasticabout an Australian Football League match-up between Carlton and Collingwood thanabout the World Cup final. [email protected]

The memory of Croatia’s legendary rush tothe semi-final in its first FIFA World Cup ap-pearance in 1998 remains vivid. Similarlyimpressive is the rapid economic upturn the country has experienced in the wake of a turbulent decade. Thanks to a strongtourism sector and the establishment of internationally competitive textile andchemicals industries, the country has man-aged to achieve average GNP growth of 4.4% over the past five years. TodayCroatia is a candidate country for EU mem-bership, yet it must still overcome some hurdles. Government intervention is still the order of the day, and the privatisationof state-run companies is challenging. Howeve, reforms are a high priority, withthe result that Croatia could become a fullmember of the EU as early as 2009. In themeantime, Croatia can wow sports fans inGermany with its national team: Its strongmidfield combined with striker ace DadoPrso mean that Croatia is well on its way to realising its [email protected]

Having been in the throws of an economiccrisis for more than a decade, nobody really expected Japan to make a sustainedrecovery. But like a Phoenix rising from theashes, Japan has recovered in the past fewyears and is as strong as ever. The bankingsystem has largely eliminated the non-per-forming loans which stemmed from the real estate crisis and are once again back ontrack. Years of deflation seem to have cometo an end and with it the zero interest ratepolicy of the central bank. Only nationaldebts have not seen any improvements anda great deal of effort is needed to reversethe current trend. Nobody is really countingon Japan when it comes to the final roundof the Football World Cup. But the samewas true with regard to its economy. Thecountry was almost written off. PerhapsJapan will surprise us with more than justits economy. [email protected]

UBS investor’s guide special edition April 2006 29

Group G

Group H

FranceA better World Cup than 2002 is likely, but the winners of 98 areeight years olderPossible ranking: At least the quarter finals

SwitzerlandOne of the best Swiss teams everPossible ranking: Eighth Final is feasible, everything afterwardis a bonus

Korea RepublicAlways a strong contender, on a good day they could win againstevery opponentPossible ranking: The second round cannot be excluded

TogoProbably only a sparring-partner, but Senegal was also rated like thisback in 2002.Possible ranking: Elimination in the first round

SpainA disappointment this year again?Possible ranking: Elimination against Brazil in the quarter finals

UkraineShevchenko should be able to boost Ukraine in the second roundPossible ranking: At least Eighth Finals

TunisiaA surprise is possiblePossible ranking: Through the first round seems difficult

Saudi ArabiaA team that gets better year after year, but in a very tough groupPossible ranking: Elimination in the first round is very likely



France


SwitzerlandKorea Republic Togo






Median age 35.1

FIFA ranking 31


Key facts Korea Republic





Median age 17.9

FIFA ranking 58


Key facts Togo





Median age 40.8

FIFA ranking 35


Key facts Switzerland





Median age 39.3

FIFA ranking 8


Key facts France

When France lifted the World Cup in 1998,the event triggered a spending frenzy thathelped the economy weather the storms ofglobal downturn. Over the past years theFrench economy has outperformed the Eu-rozone. Consumer expenditure has beenthe mainstay of French growth and con-sumption has been driven largely by fallingsavings and rising indebtedness; eventhough the latter was matched by an im-pressive increase in housing wealth. Hous-ing activity has likely peaked already andgiven relatively modest wage growth andhigh unemployment, French consumerspending looks vulnerable to a downturnon the housing market. So far, the Frenchconsumers have proved to be extremely re-silient and a similar spirit should see theFrench national team win their Group G.However, winning the quarter-finals, wherethey will face the likes of Italy will be a dif-ferent matter for the ageing French [email protected]

During the World Cup qualifiers, the youngand hopeful “Nati” (national team) fromSwitzerland showed with two draws a-gainst France and the draw against Ireland that there is plenty of potential. The Swiss economy is also proving to be inexcellent condition. After around 2%growth in 2004 and 2005, there was nosign of the boom waning. Strong impetuscontinues to come from foreign demand,which this small and open national econo-my, with more than 45% coming from exports, is particularly reliant on. The liveli-er economic situation in Europe shouldgenerate additional export orders, especial-ly since the Swiss Franc continues to be low.At the same time, companies are steppingup recruitment and beginning to invest in production plants. Unemployment in2006 should thus decline from 3.8%(2005) to an expected 3.4%. Overall, weexpect a growth rate of 2.3% for 2006,with a low inflation rate of only 0.8%[email protected]

South Korea is Asia’s indisputable power-house – at least in terms of football. The na-tional team has made it to the final roundof every FIFA World Cup since 1986. Fouryears ago it celebrated an absolute highpoint in its nation’s World Cup history,when the team made the semifinal as hostcountry. Economically, however, Korea hasnot been able to keep pace with its neigh-bours (apart from Japan) in the last fewyears. Average economic growth slowed to4% in recent years, down from around 9%in the 1980s. It must be said, though, thatSouth Korea has by now attained a veryhigh standard of living on an equal footingwith that of southern European countries,which reduces the amount of catching uprequired in economic terms. Yet if econom-ic growth were the decisive factor in win-ning, Korea would remain the favourite fora long time to come. In France and Switzer-land, the country faces two tough (foot-balling) competitors in its World Cup [email protected]

To everybody’s surprise, the little country onAfrica’s west coast managed to secure aplace in the World Cup on the final day of the qualifiers. It remains to be seen howthe combination of African football skillsand discipline – the team is being coachedby German Otto Pfister – will help the teamof eleven from the former German protec-torate of Togo during the World Cup. Eco-nomically and politically, Togo has also recently experienced turbulent times. Fol-lowing the death of long-time presidentGnassingbé Eyadéma in February 2005 andthe controversial election of his son FaureGnassingbé as successor, political unrestswept the country. Economic growth wascorrespondingly low at around one percent.2006 is expected to see growth accelera-tion to 3% thanks to increased productionin agriculture and growing foreign [email protected]


Spain


Ukraine Saudi ArabiaTunisia






Median age 38.6

FIFA ranking 6


Key facts Spain





Median age 39.0

FIFA ranking 42


Key facts Ukraine





Median age 26.8

FIFA ranking 24


Key facts Tunisia





Median age 21.6

FIFA ranking 34


Key facts Saudi Arabia

While the Ukraine’s chances in this year’sWorld Cup may look doubtful, recent eco-nomic and political developments are alsonot encouraging. Early results following theMarch 26 parliamentary elections did notproduce a clear winner, suggesting thatcomplicated coalition building will domi-nate the landscape for the time being. It re-mains unclear whether former Prime Min-ister Yulia Timoshenko will succeed in out-doing efforts by President Yushchenko tobuild his own coalition with (former) politi-cal foe Yanukovich.

On the economy itself, both growth andthe current account surplus has slowedmarkedly. While in part this can be ex-plained by base effects, looking ahead theprospects are not bright, given lacklustreinvestment spending and depressed activi-ty owing to political concerns. While theUkraine’s large international reserves aresupportive, the worsening current accountwill continue to warrant close monitoringgiven the negative effects of the Russia-Ukraine gas dispute earlier in the [email protected]

The country with the world’s largest provenoil reserves is steadily consolidating its po-sition as one of the region’s strongest foot-ball teams. They completed the 12 quali-fiers undefeated – participating in a WorldCup for the fourth time in a row. Almost as recurrent as the country’s appearances inrecent World Cups is the government’s attempt to diversify its economy away fromthe oil sector. The latter, however, remainsdominant making up approximately onethird of GDP, three quarters of governmentrevenues, and more than four fifths of ex-port income.

When it comes to investing in Saudi Ara-bian assets, most investors are relegated tomere spectators. Markets remain broadlyinaccessible for foreigners, such that thefootball team’s performance at the comingWorld Cup will probably have more impactfor most readers than the performance ofthe country’s stock [email protected]

Tunisia wrote sporting history in 1978 whenit became the first African team to win agame at a football World Cup. Seekingcompetitiveness not only on the pitch, theeconomy widely embraces a liberal tradepolicy – exemplified by the country’s export-oriented textile industry. After experiencinga setback following the dissolution of theMultifibre Agreement at the start of 2005,the sector is actually expected to attractnew direct investments in the coming years.Together with a strong tourist industry andinvestments in infrastructure, the recoveryof the textile industry will likely contributeto stronger GDP growth in 2006, after aslight downturn in 2005. Being one of thefew emerging market countries regularly issuing debt securities denominated in EUR,the country’s assets provide an alternativein an increasingly USD focused asset [email protected]

Spain’s economy has been doing outstand-ingly for years. In real terms, GDP growth isnot only accelerating, but at 3.4% in 2005was also well above the average in the Eurozone (1.4%). The driving force behindthe Spanish economy was the strong domestic demand. We expect that with anticipated growth of 3.0% in 2006 and2.5% in 2007 Spain will be able to scorepoints in an international comparison. Nevertheless, some weaknesses can bemade out: High inflation rates have foryears been eroding the competitiveness ofSpanish businesses and private debt is com-paratively high. Politically, the situation hascalmed down following an agreement withthe Catalans who have been striving forgreater independence. Overall, we seeSpain in a positive light – rapid and signifi-cant changes are not expected. In sportingterms, this consistency could not be wishedon “La Selección”. After all this would en-tail a disappointingly early retirement fromthe competition for the Spanish footballteam, as has so often been the case in pre-vious major international [email protected]


RecommendationsRecommendations

More than only short-term influence

Hosting equity markets outperformduring World Cup (April – August)8

4

0

6

2

–2

–4 Source: Datastream / The WC/EC list is incomplete due to missing data

Ger

man

y 74

Italy

80

Fran

ce 8

4

Ger

man

y 88

Italy

90

Swed

en 9

2

USA

94

UK

96

Fran

ce 9

8

Net

herla

nds/

Belg

ium

00

Japa

n/C

orea

02

Port

ugal

04

Relative monthly performance to theMSCI World of hosting nations (average in %)

WCEuropean Championship

Consumer Staples outperform duringWorld Cup (April – August)

6

0

4

–4

2

–2

–6Source: Datastream

uneven years even years World cup years

MSCI World Consumer StaplesMSCI World Food/Beverages/TobaccoMSCI World Food/Staples RetailingMSCI World Household & Personal Products

Relative performance in %

The economic impact of the World Cup isclearly visible, especially in Germany. Basedon a simulation study, German GDP is ex-pected to increase by roughly EUR1.8bn in 2006 with an overall effect of EUR6.8bnbetween 2002 and 2010. However, otherparticipants are hardly influenced apartfrom an apparent impact on consumer con-fidence, depending on a team’s success.

Academic research shows losses can havea statistically significant (negative) impacton stock market performance, whereas victories do not. The markets of 39 footballnations averaged worse the day after a loss than they did well the day after vic-tories. This corresponds to our findings. Forexample, the German market dropped1.42% after its loss in a friendly match

Major football events touch more than just supporters’ hearts. Verifiably, stockmarkets and economies are influenced. But is this economic fact or psychology?Can strategies be developed to benefit from these effects? While the economicimpact is tangible – particularly in the host country – stock market moves appeardriven by subjectivity. We have looked at equity market performance at coun-try and sector levels. Moreover, we have explored whether this influence is dif-ferent for developed countries and emerging markets.

against Italy in March this year, while rising0.25% after winning against the US fourweeks later. Needless to say, this relation-ship only exists in “football” countries andnot in countries like the US.

We believe there is also a mid-term influ-ence on stock markets, though confined tothe host country. In detail, we found that in11 out of 14 cases since 1974, as the left-hand graph shows, the “hosting” stockmarket outperformed the broad marketfrom April to August in the tournamentyear. Interestingly, World Cup 2006 hostGermany outperformed the broad marketboth in 1974 and 1988 when they hosteda World Cup and a European Champi-onship, respectively.

Football tournaments tend to influencethe performance of certain sectors. Asshown in the right-hand graph, “ConsumerStaples” and its sub sectors outperformedthe market in tournament years beginningin 1996 and especially during World Cupyears. Other sectors like Media and Trans-portation, where one may also expect highcorrelation to such events, did not profitfrom the same effect.

Generally, there seems to be an effect onemerging markets with strong football cul-tures. Especially nations like Brazil tend toreact very strongly to football results. How-ever, this is not always true and the impactis difficult to assess, given that high marketvolatility and low liquidity influence thesemarkets.

The results are likely mostly psychologi-cally driven, with the effect on consumerconfidence a good example. The loss effectis probably caused by overly enthusiastic ex-pectations before a game, so losses surprisemore than victories. Put differently, the“home” team is always expected to win.The same likely applies for the strong per-formance of some sectors in the mid term.Investors appear to prefer certain sectorsbecause they are expected to profit frommajor football events. However, profits, asmeasured by EPS growth, are barely influ-enced. The overall positive performance im-pact on hosting countries, on the otherhand, can derive itself both from positivesentiment and economic data: GDP is influ-enced positively beyond the actual year ofthe tournament and a generally positivemood can influence the stock market psy-chologically. Small market capitalization is areason why emerging markets are influ-enced more easily than developed markets.Besides, due to higher local ownership,

emerging markets tend to be affected moreby national football given its large influenceon locals.

Obviously, these findings must be treat-ed carefully, as statistical significance isdoubtful and we have found several excep-tions. That said Germany, as host of the2006 World Cup, is an interesting exampleitself. It has already received the award of“World Champion” in pessimism. Whilenot connected to the World Cup, it reflectsGermany’s view on football, with an unusu-ally low 9% believing the home team canbecome World Champion. Hence, invest-ment opportunities could emerge with lowexpectations leaving room for upside po-tential if football surprises positively. How-ever, banking on this or any other of theshown effects bears significant risks and iscertainly not suitable for the faint hearted. [email protected]@ubs.com



The Good, the Bad, and the UglyEquities USD/EUR Bonds Local Currency Bonds

Angola � � �Argentina ☺ ☺ ☺Brazil ☺ ☺ ☺Costa Rica � ☺ ☺Cote d’Ivoire ☺ ☺ ☺Croatia ☺ ☺ ☺Czech Republic ☺ ☺ ☺Ecuador ☺ ☺ �Ghana ☺ � �Iran � ☺ �Korea ☺ ☺ ☺Mexico ☺ ☺ ☺Paraguay � � �Poland ☺ ☺ ☺Saudi Arabia ☺ ☺ �Serbia � ☺ ☺Togo � � �Trinidad & Tobago ☺ ☺ ☺Tunisia ☺ ☺ ☺Ukraine ☺ ☺ ☺Source: S&P, Bloomberg, UBS WMRThe table indicates existence of the different assets. However, it is possible that some assets are not accessible for all investors.

Asset class availability

A strong performance on the football fieldby Angola, Ghana, Paraguay and Togocannot have any market implications asthese countries have almost no securitiesavailable. Saudi Arabia and Iran, on theother hand, are countries that do have se-curities markets (very liquid in Saudi Ara-bia’s case), but are largely closed to for-eign investors. Any rally will be enjoyedonly by the locals. Côte d’Ivoire’s bonds,on the other hand, may be attractive forinvestors with a taste for distressed as-sets. But no football-related enthusiasmwill be sufficient to raise the recovery value of defaulted bonds.

The bulk of the remaining countries,however, have reasonably liquid tradablemarkets. However, investors should care-fully distinguish between those that aregood medium-term ideas and thosewhere a rally would be providing a goodopportunity to sell. Two famous footballcountries provide an excellent example ofthese two groups: Brazil and Argentina.With sound economic fundamentals,Brazil’s real-denominated bonds and equi-ties continue to provide investors with excellent opportunities. Argentina’s in-creasingly radical approach to economicpolicies invites radical investment strate-gies. This is a market for investors to re-main vigilant, nimble, and ready to exit.

Countries that continue to provide investors with good medium-term economic prospects include Croatia, theCzech Republic, Korea, Mexico, Polandand Tunisia. More uncertain prospectsface Ecuador, Serbia and the Ukraine. Ofthe former group, we find the greatestvalue in Korean equities as well as select-ed Mexican corporate bonds and peso-denominated fixed income products. InPoland, the Czech Republic and Tunisia,while economic prospects are very bright,bond and equity market valuations arenot particularly compelling. Within thelatter group, the worsening current ac-count and political uncertainties aredampening the outlook for the Ukraine.Recent news of Ecuador’s partial call of itshigh coupon 2012 is certainly positive forthe debt outlook.

A good investment strategy is to useany world-cup-related market movementsto adjust portfolios in line with medium-term economic and market fundaments.For example, a bad performance by Brazilmay provide a good opportunity to investin Brazilian assets, while a good perform-ance by Argentina could provide the rightmoment to sell Argentinean investments. [email protected]@ubs.com

This year’s qualifiers for the world cup have produced an eclectic mix of coun-tries. One should not be surprised if local markets in some of these have a short-lived rally on the “feel good” factor of a good performance at the World Cup.But investors looking for such opportunities in the more exotic markets may befrustrated.



The 11 Performers: Our World Cup Equity Team

Event Dates Our 11 selected MSCI Worldplayers (%) index (%)

Sweden 26 March – 13.86 0.511992 26 June 1992USA 17 May – 17.42 1.931994 17 August 1994England 30 March – 11.69 3.011996 to 30 June 1996France 12 May – –1.83 0.971998 12 August 1998Netherlands 2 April – 4.82 –3.472000 2 July 2000Japan-Korea 30 March – 10.22 –8.992002 June 2002Portugal 4 April – 6.99 –1.022004 4 July 2004Average 9.03 –1.01Source: Citigroup, UBS WMR

Back-testing results

We have screened the universe of globalstocks looking for stocks that have consis-tently outperformed the broad market inthe three months leading up to the finals ofour two major tournaments, the World Cupand the European Championship.

Talent spottingFor our back-test, we selected the last fourEuropean Championships and the last threeWorld Cups. The following criteria wereused for selecting the stocks for our team:� The stocks must have outperformed the

broad market (the MSCI World) in thethree months leading up to the final dayof the championship

� The outperformance in this three-monthperiod must be traceable to the actual

football event and not to other reasons.Hence, we only include stocks whoseoutperformance in the three-month pe-riod is stronger than its outperformanceduring the rest of that same year. Thisway, we exclude companies whose out-performance is due to reasons other thanfootball championships.

� We only include companies that haveconsistently outperformed the market inthese periods. Hence, we only includestocks that fulfil the previous two criteriain at least five of the last seven footballchampionships; the last three WorldCups and the last four European Cham-pionships.

� We only include companies covered byUBS Wealth Management Research.

Seventy two stocks fulfilled the above crite-ria. Out of these 72 companies, we have selected the 11 whose business activitiesshould benefit the most from the footballevents from a fundamental point of view.We have positioned each of the 11 stockson the playing field in order to give addi-tional flavour to the solution. The table onpage 38 shows our dream team of stocksready to play the World Cup.

Compelling back-testingIf we had selected an equally-weighted basket of these 11 selected stocks in the

three-month period ahead of the final gamesof our seven major football championships,this basket would have had extraordinary re-sults, as shown in the table below.

For a start, the basket outperformed theMSCI World index six out of seven times;and the outperformance was very signifi-cant in most cases. Even in the last threeevents, when the index was down, this bas-ket of stocks would have shown clear pos-itive results.

The average performance of our 11 stockswould have been 9.03% in the three monthsprior to the finals, while the index itself yield-ed a negative 1.01% in that period.

Players and positionsIn order to better understand why thesecompanies consistently outperform themarket during football championships, we will take a brief look at each company’sactivities and comment on the reasons for their consistent outperformance. Forsome companies, the reasons for outper-

forming the market are more obvious thanfor others. We have included a commentas to where we think each player should be positioned as depicted on the pitch onpage 41.

Nintendo: playmaker in the midfieldNintendo no doubt stands to profit from big football tournaments through its variousfootball video games. Youngsters (and not-so-young-sters) get excited by the World Cupand the hype surrounding the star players.This large group is primed to play (and henceto buy) Nintendo football videogames.

Nintendo is our playmaker in the mid-field, a position requiring a high degree oftechnical skill, excellent peripheral visionand quick reflexes. By moving the ballaround quickly and accurately in the mid-field, Nintendo will no doubt create manyscoring chances for our attacking line

Holcim: goalkeeperThe World Cup always involves major infra-structure projects in the host country. Hol-cim should benefit handsomely from an in-crease in building materials sales, as well asin its engineering consulting services.

A great team always starts with a greatgoalkeeper, and here we have a rock-solidchoice. Solidity is a key asset for a goalkeep-er as it inspires confidence in the whole de-fence. Holcim can build a concrete wall infront of the goal, making sure that no shotsgo in.

Heineken: defensive midfielderIncreased beer consumption during theWorld Cup seems likely, based on empiricalfield observations by the analyst team, sothe tournament should be a positive for thestock.

Stock Valor ISIN

Nintendo 762 921 JP3756600007 Holcim 1 221 405 CH0012214059 Heineken 1 804 984 NL0000009165Canon 761 599 JP3242800005Coca-Cola 919 390 US1912161007 Scottish & Newcastle 404 256 GB0007839698Fuji Photo Film 761 845 JP3814000000Tesco 408 910 GB0008847096 Intercontinental Hotels 2 148 614 GB00B07Q1P26Puma 481 322 DE0006969603 Beiersdorf 324 660 DE0005200000Source: UBS WMR

The 11 selected stocks

A football team has 11 players, and we have selected our own team of 11 stocksthat have consistently outperformed the broad market in the three-month peri-od leading up to two major football events, the World Cup and the EuropeanChampionship. These 11 stocks constitute our ideal stock line-up for the WorldCup. We recommend investing in these stocks immediately and closing the in-vestment on the final day of the World Cup.



Holcim

Heineken

Scottish & NewcastleBeiersdorf

Intcntal.Hotels Tesco

PumaCanon Fuji

Coca-ColaNintendo

Our World Cup line-up

We position Heineken as a defensive mid-fielder. This is a tricky position: on the onehand, its distribution capabilities shouldmake sure the ball moves swiftly up fieldfrom the defensive zone to the midfield; onthe other hand, too much beer can blur ateam’s defensive capabilities

Canon: forward playerThe huge interest in big football tourna-ments, with their worldwide media atten-tion, is beneficial for digital imaging tech-nology devices, such as cameras, videorecorders, etc.

Canon is one of our forwards, as its top-of-the-line cameras have the necessaryquick reflexes to run the right wing of theattacking line. Canon will “freeze” the op-posite team’s defenders easily, opening upmany scoring opportunities.

Coca-Cola: midfield playerCoca-Cola is present at most major sport-ing events. This World Cup will be no ex-ception, as the company is one of the mainsponsors of the competition. This presencewill help sales and raise awareness even fur-ther.

The next-generation midfield player: Co-ca-Cola is omnipresent, everywhere at thesame time, well-positioned to continuouslyintercept the ball from the opposing team,a key to a strong counterattack. This bub-bly player will surely lift our team’s morale,and its sweet character will energize play,another key asset in a midfielder.

Scottish & Newcastle: defence playerBeer consumption and pub attendance inthe UK increase famously during a WorldCup. This will clearly benefit Scottish &Newcastle. Scottish & Newcastle is a defen-

sive player. Very stable movements ensurea solid defence. The downside is that toomuch beer and chips consumption maylead to clumsiness and unnecessary penal-ties. That is why we put it on the left sideof the defence rather than the middle.

Fuji Photo Film: forward playerAs with Canon, the attractiveness of thegame and the worldwide media attentionare beneficial for digital imaging technolo-gy devices, such as cameras, video recordersetc. We put Fuji in the attacking line for thesame reasons as Canon. This company spe-cializes in fast movements, ideal for the leftwing. Fuji and Canon know each other verywell and that familiarity will foster the kindof well-oiled teamwork that can really hurtopposing teams.

Tesco: left defence playerDuring the World Cup, especially in the UK,people will cook less often and rely more onready-made food. Tesco stands to benefitfrom this trend, as it targets the lower- andmiddle-class UK consumer, the UK’s maintarget groups for football-related sales.Tesco is a defensive player, and as such, pro-vides the perfect complementary skills forBeiersdorf at the centre of our defensiveline. The breadth of its food range is a mustto protect and nurture our goalkeeper.

Intercontinental Hotels: right defence playerWe foresee a surge in hotel bookings dur-ing the World Cup, as people from all overthe world will need accommodation whenthey visit Germany to attend the games.Our right-back and fourth defender. Inter-conti’s hospitality know-how will ensurethat our goalkeeper is undisturbed. As a

global player, our right-back knows theother teams well. This is an important asset in order to prepare conscientiously for the matches.

Puma: forward playerSporting goods sales should rise in the run-up to the competition, as well as during the matches. Based in the hostcountry, Germany, we are convinced Pumawill benefit from higher-than-averagebrand awareness. Our fiercest attacker.Quick: Puma’s speed will allow it to run pastan opponent’s defensive line. Agile: perfect for jumping high and heading balls into the back of the net. Aggressive: will not be intimidated by strong defenders. Pumais certainly one of the main contenders, together with Ronaldinho, to become the top-scoring player of the tournament.

Beiersdorf: defence playerIt may be difficult to see the link betweenBeiersdorf and the World Cup, but thequantitative results are compelling. Wecould suggest, without being too far-fetched, that the World Cup leads to an in-crease in sales for packaging, personal careproducts and suntan lotion.

This solid and defensive player is ideal forthe centre of our defensive line. It is ideallypositioned to protect our goalkeeper andmask the effect of the opponent team’s at-tacks. Its surgical capabilities will ensure ourgoalie remains healthy. Also, its “creamy”nature will ensure a smooth transition fromdefence to mid-field.

ConclusionIf you want to win the World Cup, you needyour team to have a wide range of skills.Another key asset for your team is confi-

dence based on consistent good perform-ance during past tournaments. With thisselection of 11 stocks, we have satisfiedboth of these criteria. So, enjoy the gamesand join us in watching how our 11 [email protected]

42 UBS investor’s guide special edition April 2006

Disclosures

EnterprisesArgentina 1. Beiersdorf 2. Brazil 1, 3. Canon 4. Coca-ColaCo. 1, 4, 5, 6, 7, 8, 9. Croatia 10. Ecuador 2. Fuji Photo Film4. Heineken 4. Holcim 1, 3, 11. Kingdom of Sweden 10. Ko-rea (Republic of) 1, 3. Mexico 1, 3. Nintendo 4. Poland 12.Puma 4. Republic of Italy 1, 3. Scottish & Newcastle 1, 11,13, 14. Tesco 1, 4, 15. Ukraine 1, 3. United Kingdom ofGreat Britain 1, 3.

Footnotes1 Within the past 12 months, UBS AG, its affiliates or sub-

sidiaries has received compensation for investmentbanking services from this company/entity.

2 Within the past three years, UBS AG, its affiliates or sub-sidiaries has received compensation for investmentbanking services from this company/entity.

3 UBS AG, its affiliates or subsidiaries has acted as man-ager/co-manager in the underwriting or placement ofsecurities of this company or one of its affiliates withinthe past 12 months.

4 UBS Securities LLC makes a market in the securitiesand/or ADRs of this company.

5 This company is, or within the past 12 months has been,a client of UBS Securities LLC, and investment bankingservices are being, or have been, provided.

6 This company is, or within the past 12 months has been,a client of UBS Securities LLC, and non-securities serv-ices are being, or have been, provided.

7 This company is, or within the past 12 months has been,a client of UBS Securities LLC, and non-investmentbanking securities-related services are being, or havebeen, provided.

8 Within the past 12 months, UBS Securities LLC has re-ceived compensation for products and services otherthan investment banking services from this company.

9 A member of the UBS Wealth Management InvestmentStrategy and Research team, or one of their householdmembers, has a long common stock position in thiscompany.

10 UBS AG, its affiliates or subsidiaries has acted as man-ager/co-manager in the underwriting or placement ofsecurities of this company or one of its affiliates withinthe past three years.

11 UBS AG, its affiliates or subsidiaries expect to receive orintend to seek compensation for investment bankingservices from this company within the next threemonths.

12 UBS AG, its affiliates or subsidiaries has acted as man-ager/co-manager in the underwriting or placement ofsecurities of this company or one of its affiliates withinthe past five years.

13 UBS Limited is acting as manager/co-manager, under-writer or placement agent in regard to an offering ofsecurities of this company or one of its affiliates.

14 UBS Limited acts as broker to this company.15 UBS AG, its affiliates or subsidiaries held other signifi-

cant financial interests in this company/entity as of lastmonth’s end (or the prior month’s end if this report isdated less than 10 working days after the most recentmonth’s end).

Explanations and sources for the tables

GDP per capita: in USD, purchasing power parity – adjusted exchange rate (PPP, 2005), Source: IMF

GDP growth: Average GDP growth of last 5 years in %,Source: IMF

Inflation: Average inflation rate of last 5 years, in %, Source: IMF

Population: Source: UNO

Median age: Source: UNO

FIFA ranking: March 2006, Source: FIFA

World Cup participations: excl. 2006, Source: FIFA

Publication data

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© UBS 1998–2006. The key symbol and UBS are registered and unregistered trademarks of UBS. All rights reserved.

PublisherUBS AG, Wealth Management Research P.O. Box, CH-8098 Zurich

Editorial teamAndreas Höfert, Editor-in-ChiefSimone Hofer, Deputy Editor-in-Chief

Product managementChristian Burger

Translations24translate.ch

Desktop publishingWerner Kuonen, Hanni LischerArthur Meier, Margrit Oppliger, René Rüegg

PrintingNeidhart+Schön AG, Zurich

[email protected]

Editorial deadlineThursday, 13 April 2006

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