Beijing Olympics 2008: A Possible Catalyst for Chinese Stocks

China today may be compared to Japan in the early 1960s--surging economy, expanding trade, optimistic sentiment, eager to put on a show for the world. The Tokyo Olympics were in 1964. Some 44 years later, in 2008, Beijing is slated to host the Summer Olympic Games. Particularly for rapidly developing economies, the Olympics are a symbol of transition, a signal to the world that the host country has entered a new era--one of international cooperation and full-fledged participation in the world economy. Along with economic growth ought to come a rising domestic stock market: Are the Beijing Olympics a bullish sign for China and a catalyst for lifting the depressed Chinese stock market?

Let's have a look at Olympic history, to see how other stock markets have fared in the years before and after their respective countries hosted the Games. Post-World War II, the chronology of locations of the Summer Olympics runs as follows:

1948: London, U.K.
1952: Helsinki, Finland
1956: Melbourne, Australia
1960: Rome, Italy
1964: Tokyo, Japan
1968: Mexico City, Mexico
1972: Munich, Germany
1976: Montreal, Canada
1980: Moscow, Russia
1984: Los Angeles, U.S.
1988: Seoul, Korea
1992: Barcelona, Spain
1996: Atlanta, U.S.
2000: Sydney, Australia
2004: Athens, Greece
[2008: Beijing, China]
[2012: London, U.K.--coming complete circle in 64 years]

Using www.globalfindata.com, I have been able to find stock market performance data for about half of the above countries (generally the ones with larger economies) around their Olympic years:

Olympic Year: City, Country: Annual Change in Local Stock Market Index
(Returns indicated are for nine consecutive years: the 4 calendar years immediately prior to the Olympic year; the Olympic year itself; and the 4 calendar years immediately following the Olympic year.)

1948: London, U.K.: 10%, 0%, 18%, -3%; -4%; -14%, 6%, 2%, -5%
1956: Melbourne, Australia: -18%, 8%, 13%, 5%; 2%; 10%, 14%, 39%, -12%
1964: Tokyo, Japan: 55%, 5%, -1%, -14%; -1%; 17%, 2%, -12%, 34%
1972: Munich, Germany: 13%, 16%, -24%, 5%; 13%; -20%, -3%, 31%, -8%
1976: Montreal, Canada: 24%, -3%, -30%, 14%; 6%; 5%, 24%, 38%, 25%
1984: Los Angeles, U.S.: 26%, -10%, 15%, 17%; 1%; 26%, 15%, 2%, 12%
1996: Atlanta, U.S.: 4%, 7%, -2%, 34%; 20%; 31%, 27%, 20%, -10%
2000: Sydney, Australia: 10%, 8%, 7%, 12%; 0%; 6%, -11%, 11%, 23%

Average Returns: 16%, 4%, 0%, 9%; 5%; 8%, 9%, 16%, 7%

(Based on the benchmark indices: U.K. Financial Times All-Share Index, Australia All Ordinaries, Japan Nikkei 225 Average, Germany CDAX Price Index, Canada TSX 300, U.S. S&P 500 Index.)

In an attempt to glean from the data (admittedly a very small sample) some type of "customary" (i.e., to the extent that there ever are robust patterns in stock market data!) Olympics-related stock price behavior, I take a look at simple "averages of the averages" using time windows of varying lengths just prior to and following the Olympic years:

The 4 Years Prior To vs. The 4 Years Following the Olympics: 7% vs. 10%
The 3 Years Prior To vs. The 3 Years Following the Olympics: 4% vs. 11%
The 2 Years Prior To vs. The 2 Years Following the Olympics: 4% vs. 8%
The 1 Year Prior To vs. The 1 Year Following the Olympics: 9% vs. 8%

Without trying to read too much into the data, I venture the following explanation that is at least consistent with the historicals:

1. Pre-Olympic Run-Up: In the year prior to the Olympic year, speculators buy stocks based on the Olympic story: domestic job creation from money being pumped into infrastructure, more flow of funds into the country from increased foreign investor focus on business opportunities, more international trade, growing economy, bright future, and so on. This leads to slightly better short-term performance of the stock market in the year prior to the Olympics (9%) than in the year following the Olympics (8%).

2. Olympic Year Fizzle: In the Olympic year itself, speculators close out their long positions, creating some selling pressure which leads to very mediocre returns for the market indices (5%).

3. Long-Term Growth Trend: The view over pre- vs. post-Olympics 2-year (4% vs. 8%), 3-year (4% vs. 11%) and 4-year (7% vs. 10%) time windows reveals a discernible growth trend, with stock market performance solid and improving, particularly following the Olympics.

What, then, is the implication for China with the Beijing Olympics in 2008? The historical data seem to favor strategic over-allocation to Chinese stocks beginning a year or two prior to the Olympics, i.e., during 2006 and 2007. If past stock market history surrounding Olympic years is any indication, we can expect improving returns in the years following the Olympics. With the domestic Chinese stock market having performed so dismally in four out of the past five years (Shanghai SSE Composite Index: -21% in 2001, -17% in 2002, +10% in 2003, -15% in 2004, and -18% year-to-date 2005), despite consistently strong fundamentals (economic growth at a rapid clip of 8% to 9% annually, as reported by the Chinese government), a reversion-to-the-mean theory too would point to better returns ahead.

So, yes, the Beijing Olympics in 2008 could very well be the catalyst for a bounce in Chinese stocks. Investors in 1964, the year of the Tokyo Olympics, who bought Japanese stocks and had the patience to hold during the years following the Olympics, realized double-digit gains averaging 10% for the four-year period 1965-1968, in sharp contrast to the negative Japanese stock returns in 1962 (-1%), 1963 (-14%) and 1964 (-1%). With China having entered the WTO and exhibiting more sensitivity and willingness to cooperate with international trading partners than in prior decades, I am cautiously optimistic about China's future and the impact of her giant economy and population on the rest of the world.