Olympics brings China crisis
Question: Will China’s success in hosting the Olympics have any impact on companies and the stock market?
Answer: The Olympic Games in Beijing lived up to expectations for the excitement and passion of the global sporting festival, representing a career peak for almost 11,000 athletes drawn from around the world and, of course, a stunning opportunity for sponsors and equipment manufacturers.
For many of those involved, participation is no longer the key issue for most athletes. Now, the financial implications play a significant role. What’s more, it is no longer only on the human level that events in the pool or on the track capture the spirit of competition.
The commercial prizes at stake every four years mean that the battle between sportswear companies and equipment manufacturers, as well as suppliers, is every bit as fierce as the challenge for medals.
Among the major backers in Beijing were Coca-Cola, McDonald's and Samsung. Each of them paid up to $100m to be official sponsors. Meanwhile, Adidas spent almost $200m on sponsorship and marketing for the Games, securing the right to be defined as official sportswear partner.
Management at Adidas expect China to be the company’s second biggest market by 2010 and believe that the sponsorship agreement, which included clothing all of the Olympic officials, was a worthwhile exercise in achieving high levels of exposure to the market there.
Adidas, which is regarded as a solid company and was also the clothing supplier to the triumphant Great Britain squad, just days before the opening ceremony took place at the Birds Nest Stadium announced strong results for the second quarter of the year, with a positive contribution from emerging markets offsetting weakness in North America, a trend that is developing with many companies.
Some multi-national companies chose not to be official sponsors in Beijing, but sought to benefit from the Games in other ways. For example, the swimming equipment manufacturer Speedo raised its profile when it offered the American Michael Phelps $1m for winning an unprecedented eight gold medals.
Even before the competition got under way, China’s biggest sportswear company, named after its owner Li Ning, the former gymnast who won six medals at the Los Angeles Olympics in 1984, underlined its ambition to steal the limelight from its global rivals.
Li, suspended from a cable 25 meters in the air, lit the Olympic flame at the spectacular opening ceremony, prompting a 5% rise in the Hong Kong listed shares as investors sought to capitalise on hopes that his involvement would boost the global recognition of the company. That followed a 3.7% rise on the day of the ceremony.
But if we look behind all that has been going on, then the success of hosting the Games has not been replicated in the financial world.
China’s economy has been in a strong position thanks to resilient investment and exports, as well as a strong government fiscal position.
Recent indicators, however, are pointing to more troubled times ahead. The first half reporting season has just come to an end and earnings growth showed an average of 16%.
While any country in the West can only hope to aspire to such growth, this was way below the 25% growth that many analysts had forecasted. In addition, much of this growth came about due to tax cuts and currency appreciation rather than more sustainable sources of support.
As a result, China has picked up its own gold medal in the stock market performance league, showing a loss of around 55% since the start of the year and now over 62% off its peak this time last October. This is, I am sure, a medal it would prefer not to have won.
is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact firstname.lastname@example.org or 028 9022 1010