ubs africa 2010

Wealth Management Research April 2010

UBS investor’s guideSpecial edition

2010 World Cup in South Africa Surprising AfricaThe host’s economy • How to invest in Africa

And the World Champion is…Money can buy you a Ronaldo, but not a World Cup •Muscle drain or muscle gain?

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UBS investor’s guide special edition April 2010 3

Editorial

[email protected]

Chief Economist

Contents

This report has been prepared by UBSAG and UBS Financial Services Inc. UBSFinancial Services Inc. is a subsidiary ofUBS AG. · “UBS investor’s guide”, a UBSWealth Management Research publi -cation for private clients, is publishedmonthly, on Fridays, in German, French,Italian and English. · The publication isavailable by e-mail and in some in-stances as a printed edition. If you wishto subscribe, please contact your UBSclient advisor. · Details regarding the in-formation contained in this publication,restrictions on distribution and otherlegal considerations are given on pages40 and 41. · In all cases we advise any-one interested in selling or buying aproduct or financial market instrumentmentioned in this publication to consulttheir client advisor first. · Price informa-tion for more than 600,000 financialmarket instruments is available at www.ubs.com/quotes. · Past performanceis no indication of future perform-ance. The market prices providedare closing prices on the respectiveprinciple exchange. This applies toall performance charts and tables inthis publication.

You will find a comprehensiveglossary of technical terms on the internet site www.ubs.com/glossaire

If you require further information onthe instruments or issuers mentioned inthis publication, or you require generalinformation on UBS Wealth Manage-ment Research including research po-licies and statistics regarding past rec-ommendations, please contact eitheryour Client Advisor or the mailbox<[email protected]> giving yourcountry of residence.

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UBS Financial Services Inc. analystsdid not provide any content relatingto equity or debt securities, or issuersof equity or debt securities, containedin this report.

Editorial 3

Focus on Africa 4

South Africa Economy 10

Invest in Africa

– Overview 14

– Socially responsible investing (SRI) 17

– Philanthropy 20

Focus on World Cup 2010 26

Football pundit interview 32

Economics of Football 36

Appendix 40

Football a male sport? This has not been thecase for a long time now. And women arealso playing an increasingly important rolein African politics and business. The women(and men) in the UBS investor's guide edito-rial team are looking forward to the WorldCup and hope you enjoy this special edition.Source: www.gettyimages.com

Dear readers,In only a couple of weeks, the 19th Football World Cup will finallykick off. Lionel Messi, Cristiano Ronaldo, Wayne Rooney and theircolleagues will dazzle fans with their magic. Or, in some cases (let’shope not too many), they may fail to live up to the hopes built upsince the last contest in Germany four years ago. Whatever hap-pens, for a full month, millions of fans around the world will puteverything else on hold as they watch a new volume of sports leg-ends written on the pitch.

Although we are all serious analysts, economists and strategists, most of my colleagues atUBS Wealth Management Research and I are nevertheless addicted to football. The chatteraround the coffee machine is slowly but surely drifting away from the fumes of Eyjafjalla-jökull, the new SEC investigations, and Chinese monetary tightening. Instead, the talk isbecoming increasingly dominated by debates about whether the Spanish team is strongerthan the Argentinean, whether the English team can reach the final or whether the mostobvious contender, Brazil, will win its sixth title.

One of the aims of this UBS investor’s guide is to share our enthusiasm for the event. Onceagain, we have applied our usually quite dull analytical toolbox to deciphering the beauti-ful game's most coveted championship. However, this latest investor's guide is based onmore than just football frenzy.

As this is the first World Cup to be held in Africa, we thought it would be useful to take acloser look at a continent that is too often forgotten when it comes to searching for invest-ment opportunities or, even more simply, when assessing the state of the world economy.Bear in mind that Africa accounts for 15% of the global population and, owing to its strongdemographic trends, is likely to accounts for 20% in just a couple of years.

We hope you enjoy the entertainment section of this issue, but we also urge you to studythe information and analysis we present on Africa.

UBS investor’s guide special edition April 2010 54 UBS investor’s guide special edition April 2010

Focus · AfricaAfrica · Focus

Surprising Africa: Know the score

15

12

6

9

3

0Source: UBS WMR

Exports

Imports

Chin

a

USA

Ger

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y

Japa

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UK

Switz

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China has become South Africa’s largest trading partner

Figure 1

South Africa’s total trade (exports plus imports in bn USD).

Aside from some well-worn clichés,relatively little is known in the rest ofthe world about the continent thatwill host the World Cup in 2010. Inthis article, we highlight 10 surprisingthings you may not know aboutAfrica.

China has overtaken such heavyweights asthe US, Japan, Germany and the UK tobecome the country’s largest trading partner(in terms of total trade). China’s leading rolecomes just 10 years after establishing diplo-matic and trade relations with South Africa.In 2009, China provided 16% of SouthAfrica’s imports and bought 11% of thecountry’s exports. Taking a look at Africa asa whole, Africa’s exports to China increasedby a yearly average of 31% between 2000

and 2008, which compares with 13.5% forexports to the United States. At the sametime, China is engaging increasingly in for-eign direct investments in Africa, but com-pared with developed countries, the involve-ment is still at a relatively low level. While alarge part of China’s imports from Africa andforeign direct investments in the continentare attributable to the Asian giant’s largecommodity hunger, this relationship is notlimited to commodities. China is also invest-ing in African infrastructure and uses its ownexperience to help develop and run specialeconomic zones designed to attract invest-ment. With its energy hunger, China willcontinue to support African commodityexporters and, in the longer term, will likelyhelp the continent grow richer.

Some 40% of Africans already own a mobilephone – no other continent has higher sub-scriber growth. In a continent three times aslarge as the United States, but only a third as

densely populated, telecommunicationinfrastructure is in big demand. Whereasdeveloped nations often use the internet,retail and service networks, or marketplaces,mobile phone systems in Africa are nowmaking many such services available for thefirst time: weather forecasts, health advice,and even mobile money – a virtual bankaccount that enables payments for manygoods and services, including electricity andschool bills, directly from a handset. Theseservices are often cheaper, faster and morereliable than the erstwhile alternatives.According to a recent study, adding 10 extra

phones for every 100 people in a typicaldeveloping country boosts GDP per personby 0.8 percentage points. This makes themobile phone one of the most importantdrivers of living standards in Africa.

The African Union is made up of 53 diversecountries whose inhabitants speak more than2,000 languages. Per-capita GDP in 2009, forexample, was 51 times higher in EquatorialGuinea (USD 8,760) than in the Democratic

China is South Africa’s most important trading partner1

Africa: more diverse than youthink3Highest mobile phone

subscription growth2

10000

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0Source: IMF, UBS WMR

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ongo

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GDP per capita in USD, 2009 estimates

Eq.

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GDP per capita in selected African countries

Figure 2

Source: www.masterfile.com

The African Union is made up of 53 diversecountries whose inhabitants speak more than2,000 languages. Also GDP per capita varies considerably.


Africa · Focus Focus · Africa

Republic of Congo (USD 170), and the aver-age GDP growth over the last three years inAngola (11.3%) was 17 percentage pointshigher than in Zimbabwe ( –5.7%). The num-ber of coups and plots in Africa has beentrending lower in recent years, but the conti-nent still leads the global rankings if we lookat the last 30 years. However, in the pastdecade, civil conflicts have occurred in only afew of the continent’s many countries, mainlylocated in the Saharan belt and in a couple ofother sub-Saharan countries. Africa is com-monly perceived as a mere commodity pro-ducer. Although it is true that commodities(including diamonds, gold, oil and variousagricultural products), are an important driverof exports, consumers in many advancedAfrican countries – and the companies thatserve them – are on the rise.

The agricultural sector on average makes up25% of the African economies’ overall eco-nomic production. This compares, for exam-ple, with 1% in Switzerland. In spite of themajority of the Sub-Saharan labor forcebeing employed in the agricultural sector,most African countries cannot provideenough food themselves. Because mostAfrican countries import significantly morefood than they export, fluctuations in foodprices on the world market strongly affectprices paid by Africans. Rising prices of agri-cultural goods in 2007 and 2008 led to sig-nificant increases in local food prices, withaverage inflation in Sub-Saharan countriesrising from 7% in 2007 to 13% in 2008. Asa typical African household spends half of itsincome on food, higher food prices in local

currency, coupled with lower incomes owingto the recent global economic and financialcrisis severely squeezed African householdsbudgets. The UN estimates that in 2009 thenumber of hungry people in the world roseto more than one billion, of which around

one-third are Africans. This is an increase ofapproximately 10% compared with the pre-vious year, and is sadly the highest numberin the last 40 years.

Africa’s Congo River could provide theenergy for the world’s largest hydropowerplant. According to the World Bank, the con-tinent’s largest river in terms of watershedholds the potential to produce 100gigawatts of hydropower – more than thecombined capacity of all of France’s nuclearpower stations. The mineral-rich DemocraticRepublic of Congo is Africa’s fourth mostpopulous country, but also one of its poor-est. Currently, the state power utility deliverselectricity to just 7% of the country’s 68 mil-lion people. With access to electricity beingone of the ingredients for sustained eco-nomic growth, the Congo River project

might be a first step toward a less commod-ity-dependent region. To make the USD 80billion project feasible, the Congo has part-nered with Angola, Botswana, Namibia, andSouth Africa to share the resulting costs aswell as the generated power. However, the

high financing costs, widespread corruption,and lack of agreement between govern-ments and other participants on key issueshave slowed the project’s progress. The factthat more and more countries, banks andother private companies are starting to par-ticipate in global carbon offset programsmay, however, fuel renewed hope for theproject’s success.

African airlines’ accident rates came down by77% in 2005–2008, while global accidentrates actually increased 5%. According tothe International Air Transport Association(IATA), African airlines were three times saferthan those of Russia & the Commonwealthof Independent States (CIS) in 2008, and 1.2times safer than Latin American airlines.Nonetheless, African airlines saw a sharp

renewed increase in accident rates in 2009,and there is still a lot of catching up to do:The accident rates in Europe were still 22times lower than in Africa last year. At thesame time, however, African air traffic is alsogrowing denser – between 2001 and 2008,the number of passengers on African-ownedairlines increased by more than 46%. Newairports are being built and new flight routesestablished in many parts of Africa, but,admittedly, the majority of African flights stilltake place in the relatively well-developednorthern countries, as well as South Africa,and is associated mainly with tourism. Thegrowing importance of African tourism isalso reflected by the fact that last year 17%of all passengers leaving the European Unionby plane were flying to a destination on theAfrican continent. Looking ahead, severalAfrican aviation authorities are seekingnegotiations with Europe on a common air-space.

Rwanda holds the world record for the high-est quota of female members in parliament.Since the last elections in 2008, women out-number their male parliamentary counter-parts, making up over 56% of parliament.The trend only really took off when a changein the constitution reserved a 30% minimumquota or at least 24 seats for female parlia-ment members. After changing the constitu-tion in 2003, the proportion of women inRwanda’s government rose from zero to 30percent. Rwanda is joined by Angola(37.3%), Burundi (30.5%), Mozambique(34.8%), South Africa (33%), Tanzania(30.4%) and Uganda (30.7%) as the sevenAfrican countries with the highest quota of

African airlines growing larger,and becoming safer6

Murchison Falls, Uganda / Source: www.masterfile.com

World’s largest hydropowerpotential in Congo5

Women ruling Rwanda’s parliament7

Large agricultural sector, notenough food4


Africa · Focus Focus · Africa

female parliamentary members. African gov-ernments frequently see women as criticalpartners to alleviate rural poverty and todiversify the economy, moving from depend-ence on agriculture and natural resources toa more knowledge-based approach.Nonetheless, this is a slow and ongoingprocess that will require time to translate intoreal effects for the economy.

Trade between African countries makes uponly 10% of their total trade. The remaining90% consists of trade with the rest of theworld. One of the reasons for such lowregional trade is that African countries arepredominantly exporters of commodities,such as oil, gas, and precious metals, whilefew countries on the continent have themanufacturing expertise needed to processthese commodities into higher-value prod-ucts. Yet, there are also structural and polit-ical reasons, such as weak infrastructure andrestrictive tariffs that hinder trade. To miti-gate these barriers, customs unions and freetrade areas are being created. In WesternAfrica, for example, the implementation of

plans to upgrade railways should reducetransport costs. Several countries in Westernand Central Africa also already share a com-mon currency, the CFA franc, which con-tributes to the harmonization of monetaryand fiscal policies in the region. While manyof the initiatives have not yet shown thedesired success, they are forums forexchange and co-ordination betweenAfrican states, which may form the basis forjoint progress towards economic develop-ment and the strengthening of political insti-tutions in the future.

One African in two is a child. This fountainof youth is largely the result of declining mor-tality rates owing to the increased use of vac-cines and antibiotics, as well as better accessto safe water. Since the 1980s, however,birth rates in Africa have been falling bymore than mortality rates, resulting in fewerchildren per family. For instance, inBotswana, women on average had 6.4 chil-dren in 1981, which fell to 3.2 in 2006. Thismeans that the age-groups going into theworkforce at present and over the next

decades will be larger than the population ofchildren and aged dependants that they sup-port, meaning that income per capita canrise faster. This constellation – the reverse ofthe rapidly aging populations of Europe, theUS and Japan – is called the demographicdividend, and is also believed to have playedan important role in the economic miraclesof the so-called Asian Tiger nations over thelast decades. However, it is no done deal thatAfrica will be able to benefit from its shiftingdemography: In particular, in Sub-SaharanAfrica HIV/AIDS threatens to decimate theworking-age population, while more gener-ally poor education, corruption, as well as alack of well-regulated markets put at risk thepositive effects of Africa’s demographictrends. Nonetheless, demography probablyremains Africa’s biggest opportunity of thenext 50 years.

Africa holds an estimated 13% of the world’sproven crude oil reserves and – owing tonew discoveries – likely even more. At pres-ent, the continent produces 12% of the

world’s crude oil supply and consumes lessthan 4% of this, thus leaving the continentwith a large surplus. On the back of emerg-ing Asia’s ever-growing hunger for naturalresources, pressure on expanding productionis omnipresent, and we can expect Africa toremain a growing source of commodity sup-ply in the years to come. However, takinginto account that 14.7% of the world’s pop-ulation lives on the continent, Africa doesnot enjoy excessive energy reserves in thelong run. As African economies develop andgrow, they too will have a bigger appetite forenergy. Extrapolating historical numbers sug-gests that Africa might become a netimporter of oil by 2040. Thus, supplying theworld with non-renewable resources todaycomes at the cost of scarcity for futureAfrican [email protected]

[email protected]

[email protected]

Analysts, UBS AG

Little trade within Africa, butgrowing integration

8

Growing richer through smallerfamilies

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Africa as a potential net oilimporter in 2040

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ConsumptionProduction

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

Massive excess production, but for how long?

Figure 4

Daily oil production and consumption inAfrica, in thousand barrels.

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Source: Women in parliament, Inter-parliamentary Union, UBS WMR

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Women in the world’s parliaments

Figure 3

Percentage of female parliament members inselected countries: Rwanda holds the worldrecord.


Economy · South AfricaSouth Africa · Economy

South Africa – the host’s economy

South Africa has maintained its statusas Africa’s uncontested economicpowerhouse, generating nearly aquarter of Africa’s total GDP. However,the country is losing ground relativeto its global emerging market peers. We take a closer look at the rainbownation’s economy reveals seriousstructural challenges and the risk thatthe significant achievements of thepast could be eroded.

South Africa’s hosting of the Football WorldCup can be interpreted as recognition of thecountry’s economic and political progress.However, as the current debacle surroundingGreece – which hosted the Olympic Gamesin 2004 – shows, the staging of even a hugeinternational sporting event is by no meansa guarantee of future economic success.

South Africa’s progress over the 15 yearssince the end of apartheid has been basedlargely on political stability, prudent eco-

nomic policies and a solid regulatory frame-work: The government has maintained tightcontrol over spending and has expanded thetax base, resulting in healthy, low levels ofgovernment debt. Central bank policy hasremained focused on containing inflationdespite complaints that interest rates weretoo high and the South African rand toostrong. Moreover, South Africa has been ableto rely on its world-class legal system andregulatory environment, and it is recognizedinternationally for its high standards in cor-porate accounting and investor protection.

Losing groundAlthough South Africa obviously hasachieved much and remains predominant inAfrica (see Text Box), a closer look at theeconomy reveals that it has continually lostground relative to its emerging market peers.This is reflected in South Africa’s relativedecline in terms of GDP per capita. AlthoughSouth Africa’s GDP per capita in 1992 wasabove that of all countries other than Turkeyin our peer group sample, it has now fallenwell behind these countries (see Chart 1,

countries selected based on similar levels ofeconomic development in the early 1990s).The picture of relative deterioration is con-firmed when purchasing power is accountedfor. With an average growth rate of 3.4%over the last 15 years, South Africa has alsounderperformed average world economicgrowth at 3.7%.

What is holding South Africa back?As South Africa is clearly not reaching itspotential, the question is: Which factors areacting as a brake and are thwarting eco-nomic development?

The labor market is a conspicuous candi-date. Although the official unemployment

rate is close to 25%, the true situation ismore serious. Of South Africans over 15years of age, 44% are classified as econom-ically inactive and are therefore not includedin the unemployment statistics. This isunusually high and means that finally only avery small group of workers generates thewealth on which the society as a wholedepends. To improve the living standards ofthe population at large, the country needs totap into the vast number of South Africanswho currently do not participate in the econ-omy and whose human capital largely liesidle.

Potential for investment in educationIn the light of the large number of unem-ployed, it seems contradictory that SouthAfrican firms have tremendous difficulties infilling vacant positions. This is explained bythe skills shortage in the economy that hasbeen aggravated by weak educationalresults. A high drop-out rate means that only27% of students successfully complete 12

Africa’s economic powerhouse In economic terms, South Africa remainsuncontested on the continent despite los-ing ground versus its global emergingmarket peers. South Africa provides 40%of Africa’s industrial output, 45% of itsmineral production and generates over50% of the continent’s electricity. Thelarge role of South Africa’s real economyis reflected in its financial markets: Takentogether, MSCI’s market capitalization inAfrica shows that South African stocksaccount for over 80%. In fact, the Johan-nesburg Stock Exchange (JSE) is amongthe top 20 exchanges in the world whenmeasured on market value and turnover,while South Africa’s bond markets are byfar the most sophisticated on the conti-nent. With just under 50 million inhabi-tants – approximately 6% of Africa’s totalpopulation – the South African economygenerates nearly a quarter of Africa’s totalGDP.

15000

12000

6000

9000

3000

0Source: IMF

South AfricaPoland

BrazilMalaysiaTurkeyRussia

1992 1994 1996 1998 2000 2002 2004 2006 2008

GDP per capita in USD, nominal

Other emerging markets are leading the pack

Chart 1

While South Africa has become richer on aper capita basis, a peer group comparison ofcountries with similar levels of per capitawealth in the early 1990s shows that it hasnot kept pace with the rapid growth in otheremerging markets (GDP per capita in USD,nominal).

South Poland Russia Turkey Brazil Ma-Africa laysia

Pupil to teacher ratio in primary education 31 11 17 n.a. 24 16

% populationattaining secondary education 27 51 89 28 31 35

Gross enrollment ratioin tertiary education 15 67 75 36 30 30

% university students studying science & engineering 20 22 n.a. 21 16 42

Adult literacy rate 88 n.a. 100 89 90 92

Source: UNESCO, UBS WMR

Table 1: Skills and educationEducation results still weak


Economy · South AfricaSouth Africa · Economy

years of basic education, fewer than in mostpeer group countries (see Table 1 on page11). Of these students, only one-fifth reachthe standard required to be admitted to uni-versity, resulting in an extremely low flow ofgraduates. Similarly, in technical skills such asmechanics, bookkeeping and agriculture,South Africa scores poorly with enrollmentrates of only about 5%.

Thus, while a very large part of the pop-ulation is out of work, many do not have theskills employers require. Could they not beemployed in lower-skilled jobs? These existonly to a very small extent in South Africa asthe relatively high wage levels enforced bytrade unions (also for unskilled workers),make South African companies employinglesser-skilled workers uncompetitive relativeto other emerging markets. Adjusted forpurchasing power, average wages in SouthAfrica are estimated to be more than twiceas high as in Brazil and Turkey, 1.6 timeshigher than in Malaysia and 1.3 times higherthan in Poland.

Understandably, the apartheid legacy hasleft South Africa with a strong desire to pro-vide “fair” wages. However, high wage lev-els do not reflect the country’s level of edu-cation and skills, and mean that South Africais steadily pricing itself out of global produc-tion markets.

Household finances should be consolidatedIn spite of high unemployment, SouthAfrican households have relatively high lev-els of consumption, which is funded in partby debt. This means that households, onaverage, have not been able to save. As anessential ingredient to economic progress,savings, however, are needed to fund invest-ment, e.g., to ease South Africa’s infrastruc-ture bottlenecks and to build businesses.Therefore, South Africa remains highlydependent on foreign capital for investment,and this is reflected in large current accountdeficits, which make the country vulnerableto sudden capital withdrawals and sharply

For over a century, South Africa was theworld’s largest producer of gold until, in2007, it was overtaken by China. Particu-larly during the 1970s and 1980s, goldexerted a significant influence on the econ-omy, which helped result in a very strongcurrency. The South African rand hit a peakof about 1.50 USD per rand in June 1973,more than 10 times stronger than today’slevel. Gold’s importance has diminished asthe country’s economy has diversified, andtoday’s principal sectors include the auto-motive industry, financial services, tourism,manufacturing and retail. South African

wines are world-renowned, but agricultureand food exports are actually very limited,at 4% of total exports.

In spite of the economy becoming morebroad-based, exports remain fairly concen-trated with over 50% derived from an arrayof mining products: South Africa supplies80% of the world’s platinum and is theworld’s largest producer of chrome, man-ganese and vanadium. Though coal anddiamonds may seem very dissimilar, bothstem from carbon deposits, which are com-mon in South Africa, and both remain vitalexport goods for the country.

South Africa’s economy is about more than just gold limit economic growth. It also means that –unlike most emerging markets – consumerspending is likely to remain sluggish and willnot be a driving factor in the ongoing eco-nomic recovery. Lastly, with nearly 20% ofthe population over 15 years of age esti-mated to be HIV positive, the strain onhouseholds to provide care to the ill and toAIDS-orphans is all the more severe as HIVaffects mostly those family members ofprime working age.

South Africa must act to prevent pastsuccesses from being erodedSouth Africa, therefore, faces tremendouschallenges. Not only must prudent economicpolicies be continued in order to provide theeconomy with solid foundations for the longrun, but the most important factors holdingthe country back deserve more focusedattention. At present, however, some institu-tions are not looking bold enough. The cur-rent fiscal deficits (–7.9% in 2009 and esti-mated –7.1% in 2010 versus surpluses of

0.6% and 1.2% respectively in 2006/7), willlet the country’s debt level rise quickly, andtoday’s historically low interest rates arepotentially putting at risk the country’s hard-fought reputation for keeping inflation incheck. We believe that policy makers cannotrest on their laurels. Not only should past suc-cesses not be allowed to slip, but a sense ofurgency is needed to ensure that SouthAfrica’s hard-won successes are not [email protected]

Economist, UBS AG

Source: www.dreamstime.com


Invest in Africa · Overview Overview · Invest in Africa

A lot to catch up on

Leading Africa

Promising Africa

Lagging Africa

Source: IMF, World Bank, UBS WM

Leading, promising and lagging Africa

Africa is host to 14.7% of the world’spopulation, growing at a rate threetimes faster than that of Europe. Yetits economy is still just roughly thesize of the UK economy. Given thesestriking imbalances, we believe someparts of Africa still harbor largegrowth potential in the years ahead.

Overall, Africa has been less affected by theglobal economic crisis than originallyexpected, with GDP growing 2% in 2009 asestimated by the IMF. Recently, the IMF hasupgraded its GDP growth forecasts for thecontinent to 4.3% for 2010 and 5.3% for

2011. Although these are strong numbersoverall, as a continent of 53 diverse inde-pendent countries (according to the AfricanUnion), growth potential, investment oppor-tunities and risk factors tend to greatly differwithin Africa. It is therefore important to dis-tinguish between economies that are betterand those that are less well positioned foreconomic growth and development in theforeseeable future.

Investment opportunities limited butgrowingEven though African markets have becomemore accessible to foreign investors over thepast few years, large roadblocks to foreigninvestment still exist in many cases, in partic-ular the small size of the markets and theirlimited liquidity. We want to highlight theinvestment vehicles open to most investors,namely traditional equity and bonds, but wedo note that private equity is yet a furtheroption for some investors.

Equities mainly in leading AfricaInvesting via equities is a straightforwardway to gain exposure to African growth.MSCI equity indices, which only include liq-uid stocks that fulfill minimum investabilityrequirements, are a good proxy for easilyinvestable African stocks. Taken together,these indices include USD 270 billion worthof equity market capitalization in sevenAfrican countries, as Figure 2 shows. Owingto the limited investability and low liquidityin many markets, however, most of thetracked stocks are still in the more developedAfrican markets, such as South Africa (84%),and Egypt (7%). In these regions, the mar-

ket capitalization is well diversified acrosssectors, but in the less developed “promis-ing Africa” block, it is heavily skewedtowards Financials (63%) and ConsumerStaples (26%). While the Swiss Market Indexis almost three times as large as the marketcapitalization of the African stocks trackedby MSCI, Africa’s equity universe is certainlygrowing as more countries open up anddevelop their own stock markets. PromisingAfrican countries such as Botswana andGhana are now under consideration forinclusion by MSCI.

Another way to gain equity exposure togrowth in the less developed African coun-tries is through large multinational compa-

nies that operate in these markets. Forinstance, multinational companies in theconsumer sector are likely to benefit from arapidly growing consumer base as well asoverall improving living standards in severalAfrican countries. Also, an increasing num-ber of South African and, more recently, Chi-nese companies in the energy and the indus-trials sector are set to experience growthfrom their investments in the continent.Other sectors in which South African multi-nationals are likely to benefit from Africangrowth are companies in the telecom, bank-ing, and food retail sectors. Such indirectequity investments in Africa through multi-national companies, especially those domi-

Africa, ranked by its relative economic potential

Figure 1

We evaluate five important factors that all affectthe long-term growth potential of an economy:macroeconomic factors such as growth and infla-tion, the structural development of an economy,size of the population and life expectancy, as wellas quality of governance and education. We dothis analysis for all 20 African countries whose GDPsize exceeds a minimum of USD 10 billion and aretherefore – potentially – large enough to provideinvestment opportunities (see color-coded coun-tries in Figure 1). Countries that we currentlyregard as highly unstable were excluded.

We call those African countries that, accord-ing to our indicators, are overall best positionedfor further growth and development “leadingAfrica.” They are: Botswana, Egypt, Morocco,South Africa, and Tunisia. These countries tendto be the most advanced and, for the same rea-son, also the most investable countries withinthe African continent. They have achieved a rel-atively high quality of governance and educationas well as a relatively high life expectancy, butthey are not the most populous countries on thecontinent.

Next is the group of “promising Africa,” whichrefers to African countries that are in a position to

become more advanced in a number of years,assuming that their fundamentals improve fur-ther. In this block are: Gabon, Ghana, Kenya,Senegal, Tanzania, Uganda, and Zambia. Theseinclude some of the more populous countries onthe continent and quite a few of them enjoy rel-atively good governance, but education and lifeexpectancy are still an issue in many cases.

Lastly, those countries that seem to be, over-all, less well positioned and will likely need moretime to develop are grouped as ”lagging Africa,”and are made up of: Angola, Congo Brazzaville,Congo Kinshasa, Côte d’Ivoire, EquatorialGuinea, Ethiopia, Nigeria, and Sudan. Most ofthese countries are rather undeveloped, with acomparably low quality of governance and edu-cation. Their population size differs, but theyshare a relatively low life expectancy. This groupof countries tends to be the least investable cur-rently. Even though, for example, Angola hasseen strong economic growth recently owing toits oil reserves, this has not yet translated intomore stable institutions. A few years down theroad, however, some of the countries in thisgroup may exhibit better fundamentals, sup-ported by their commodity exports.

Leading, promising, and lagging Africa


Invest in Africa · Overview Socially responsible investing (SRI) · Invest in Africa

Equity and bond market capitalizations inUSD bn.

Sustainability – a delicate flower in Africa

Source: MSCI, J.P. Morgan, UBS WMR

0 50 100 150 200

0 1 32 4 5 6

MSCI equity market cap. (bn USD, bottom scale)

JMP EMBI Global bond market cap. (bn USD, top scale)

Egypt

Gabon

Ghana

Morocco

South Africa

Kenya

Mauritius

Nigeria

Tunisia

African equities and bonds – what’s out there

ciled in developed markets, bring with themlower volatility than direct equity invest-ments in the continent, but they still can adddiversification to a portfolio.

Bonds allow further diversificationAnother way to gain exposure to African

markets – particularly also to some of the lessdeveloped “promising Africa” block – aresovereign bonds. The easiest bond invest-ments for foreign investors are internationalsovereign bonds denominated in major cur-rencies. The J.P. Morgan EMBI Global, a sov-ereign international bond index that onlyincludes relatively liquid bonds that meetminimum investability requirements, is agood proxy for easily accessible African debt.Taken together, the international bonds forall African countries make up USD 9.3 billionand EUR 2.1 billion of outstanding debtspread over five countries (see Figure 2). Oneway to gain exposure is to buy these bondsdirectly, but we advise a broad diversificationwhen doing so. Currently, none of the majorfunds exclusively track African sovereignbonds. African bonds are included in fundsthat track the EMBI Global benchmark index,

but they have little overall weight in Africa(less than 5%).

Risks and diversificationOverall, investments in African countries,especially in “promising Africa” and “lag-ging Africa” tend to be highly volatile. Economic policies may shift quickly, leadingto high uncertainty and asset price volatility.Also, any decrease in global risk appetitetends to lead to a sell-off in the less devel-oped African countries. We therefore advise interested investors to allocate only asmall part of their portfolio to African mar-kets. Also, we do not recommend exposureto single African markets, and we adviseinvestors to take a diversified approach, bothacross countries and asset classes.

Over the coming years, more of the currently less accessible African markets willlikely become open to foreign investors. Atthe same time, the already accessible Africanmarkets will tend to become less risky. Weadvise investors to keep an eye on Africanmarkets as well as our updates on them, asthey come to the forefront of [email protected]

Analyst, UBS AG

Africa does not have the reputation ofbeing a leader in sustainability issues.On closer examination, though, posi-tive examples can be found in variousareas.

Sustainability is often mentioned in connec-tion with ecological considerations, such asthe percentage of electricity outputaccounted for by renewable energies orchanges in the total area of forests. However,there is much more to it than that. The socialaspects of sustainability affect spending oneducation and health, where the state playsa leading role. In Africa, sustainability is alsoused to mean a stable institutional frame-work, which favors private enterprise andprotects property rights and thus contributesto sustainable economic success.

In global terms, Africa is a lightweight asboth an end-market and a financial center.Within emerging markets, multinationalsprefer to commit to Asia, Latin America andEastern Europe. There are some sectors,though, where Africa is a key producer:crude oil, diamonds, metals and soft com-modities like cocoa and coffee. Sadly, exam-ples are frequently uncovered showing thatthese resources are not being used in a sus-tainable way. Media attention is increasinglyfocused on internationally active companies,raising the pressure for responsible procure-ment. The reputational risks from cases ofexploitative child labor or serious pollutionare considerable.

The good news is that there are somepositives along with all the negative exam-ples. For instance, there have been initiatives

by large companies to improve environmen-tal and labor conditions in cocoa growingand create skilled jobs to increase local value-added. Equally, workplace rules in line withthe International Labor Organization (ILO)are being observed all along the supply chainand preventive HIV/AIDS policies put inplace, along with teaching programs andawareness projects. So multinationals thatact in an exemplary manner can make animportant contribution to minimum ecolog-ical and environmental standards in Africa bymaking efforts to produce in a way that is asenvironmentally and socially acceptable aspossible and – crucially – holding themselvesto account for this. We should not be overlyoptimistic, but it has become increasingly dif-

Coffee / Source: www.masterfile.com

Figure 2


Invest in Africa · Socially responsible investing (SRI) Socially responsible investing (SRI) · Invest in Africa

ficult in recent years for globally active com-panies to ignore sustainability and trans-parency.

Few opportunities for sustainableinvestment At present, there are scarcely any invest-ment instruments for Africa that explicitlyinclude ecological and social criteria. Sus-tainability products investing in emergingmarkets only pay marginal attention toAfrica, and when they do they focus onSouth Africa. This has partly to do with thedifficulty of finding companies with accept-able standards and disclosure practices.Standards are lower than in industrializedcountries, although improvements havebeen perceptible in some regions in recent

times. This improvement is related tochanges to the law and pressure on firms tooperate in accordance with internationalstandards. South Africa is clearly ahead ofthe field in the continent when it comes todisclosing non-financial indicators such asthose relating to the environment, societyand corporate governance, and second onlyto Brazil among global emerging markets.This may have to do with the fact thatSouth Africa has important firms in the min-ing industry, where environmental impact ishigh. Companies are also under a duty todisclose non-financial criteria.

The JSE SRI sustainability index waslaunched by the Johannesburg StockExchange in 2004. It mainly comprises large-cap companies, but there are also some mid-

caps. They all engage in best practices interms of environmental and social perform-ance. The performance of the JSE SRI indexhas been almost identical to that of the tra-ditional index. In March 2010, Standard &Poor’s launched a pioneering Egyptian sus-tainability index (the EGX ESG index). Sus-tainability indices allow investors to comparecompanies. They are also a good guide tobest practice (benchmarking), and encour-age companies to raise their environmentaland social standards.

Plenty of potential for microfinanceAfrica is also a laggard when it comes tomicrofinance. This involves providing a broadrange of financial services such as loans, sav-ings accounts, payment transactions and

insurance to people who previously had noaccess to them because they were poor.Microfinance is regarded as an importanttool in fighting poverty. It has not yet takenoff in Africa in the same way it has in Asiaand Latin America. Sub-Saharan Africa hasthe highest percentage of the populationmaking no use of financial services: 80%. Byway of comparison, the figure in Asia isaround 60%. Poor infrastructure, large dis-tances, low population density, and a lessstable political and social environment haveso far hindered the emergence of a well-runcommercial banking system, and hence [email protected]

[email protected]

Analysts, UBS AG

Can sport make a difference?In 2005, the International Year of Sportand Physical Education, the UN stressedthe important role of sport “to fosterpeace and development, and to con-tribute to an atmosphere of tolerance andunderstanding”. Two years later, theAfrican Union Commission launched theInternational Year of African Football, reit-erating this belief and emphasizing theprominent role football plays in Africansociety. Although it might be unrealistic toclaim that sport alone can reduce youthcrime, drug abuse, civil strife, and dis-eases, we do think sport can give peoplejoy, a positive identity, and feelings ofempowerment while fostering teamworkand promoting responsible behavior.Although we could not find a statisticallink between the percentage of football

players and crime on a country level, sev-eral studies confirm our presumption on aregional and community level.

Soccer on the forefrontAccording to data collected by FIFA in2006, the number of both youth and ama-teur football players as a percentage of thetotal population in Africa is relatively low,although the data might be flawed owingto a lack of registrations, measurementerrors, and other factors. However, com-pared with the survey undertaken in 2000,the number of soccer players in Africa hasincreased by 13%, whereas the number ofplayers in Europe and the Americasremained more or less stable. The FIFAWorld Cup in South Africa will likely fosterthis trend, and thereby help further socialdevelopment in Africa.

Country Population GDP per GDP growth GDP growth CPI inflation CPI inflation 2009 capita 2009 last 5 years 2010–20141 2005–2009 2010–20141

mn people in USD (average) (average) (average) (average)Angola 17.3 4027 14.6 7.2 15.0 10.5Botswana 1.8 5995 0.8 7.5 9.6 5.6Cameroon 19.9 1095 2.7 4.1 3.3 2.0Dem. Rep. of Congo 64.8 171 5.7 6.9 21.7 11.3Egypt 76.7 2450 6.1 5.4 10.4 7.5Equatorial Guinea 1.3 8759 7.7 0.2 4.6 4.6Ethiopia 81.2 418 10.9 7.5 19.3 7.2Gabon 1.5 7414 2.2 3.2 2.5 3.2Ghana 23.1 639 6.0 9.0 14.2 6.6Kenya 35.9 842 4.7 5.7 11.9 5.6Mauritius 1.3 7146 3.9 3.9 7.6 4.8Namibia 2.1 4341 3.4 2.5 6.1 5.2Nigeria 151.9 1089 5.5 5.7 11.0 8.6Rwanda 9.8 512 7.8 5.8 10.8 5.3Senegal 12.8 984 3.4 4.5 2.9 2.1South Africa 49.2 5635 3.3 3.8 6.8 5.0Sudan 39.1 1388 7.7 4.8 9.8 6.8Tanzania 40.5 547 6.7 7.0 7.9 5.0The Gambia 1.7 434 5.5 4.8 4.7 5.2Tunisia 10.4 3794 4.7 5.3 3.6 3.2Uganda 33.2 472 8.3 6.7 8.6 6.7Zimbabwe 11.7 303 -5.5 6.0 18.8 7.6

1Forecasts Source: International Monetary Fund, World Economic Outlook Database, 2009


Invest in Africa · Philanthropy Philanthropy· Invest in Africa

The UBS Optimus Foundation cele-brates its tenth anniversary in 2010.We spoke to CEO Christoph Schmokerabout philanthropy and commitmentsin Africa.

Mr. Schmoker, the UBS Optimus Foundationis celebrating its tenth anniversary in 2010. What are you particularly proud of?That we selected the issue of child protec-tion. In 2002, we decided to invest in theissue of protection against violence andexploitation, even though this is a very sen-sitive, taboo issue. Today, we are one of thethree most important and knowledgeableorganizations in the field in Europe, not justas a source of funds but also as an agendasetter.

Have there also been disappointments?In terms of content, our commitment to aneducational project in Afghanistan was nota success, and we did not manage to find afollow-on solution for all the children

involved when the project came to an end.When we look at the institution, we werenot sufficiently successful in making knownthe benefits of philanthropy. By that I don’tmean the financial benefits, since logic dic-tates that it is negative for the donor, but theemotion and satisfaction that come from acommitment.

What sort of people become philanthro-pists? Often they are wealthy people who want todo something good and set something upthat will last. Once they have achieved busi-ness success, inner values become increas-ingly important for such people. Our donorsrecognize that now is time to do something.Many keen donors find it hard to identify asuitable project, though. A great deal alsodepends on their personal interests. We haveimportant issues, but we don’t cover every-thing; for instance, we don’t work on envi-ronmental or animal issues. The OptimusFoundation has an open architecture,though. We are happy to help people selecta suitable environmental project, eventhough we are not involved ourselves.

What is the role of charities in society?Charities complement government spend-ing. They have advantages: they can take onmore risk than projects financed with taxpay-ers’ money. That allows charities to take upnew areas and frees them from the need tofollow political processes, so they can act astrendsetters. Climate change is a goodexample. Charities were talking about cli-

mate change long before there was a globalclimate summit.

Are there drawbacks too? There are almost no requirements for trans-parency. Hence many charities are not trans-parent. Charities often find it hard to co-operate. Our Early Childhood Developmentinitiative in South Africa is a good example.We co-operate with two other charities inthis. That’s rather the exception, though.Charities often see each other as competitorsrather than partners to co-operate with.

Aren’t charities taking on jobs that shouldreally be done by the state? That’s a fair question, but it doesn’t takeaccount of individuals. If a father in Ethiopiasees that his daughter can’t go to schoolbecause there is no schoolhouse, waiting forthe state to build one doesn’t help him. Butpeople planning projects have to considerwhen the state should get involved. Ideally,a private charity launches an initiative thatgradually has a ripple effect. For example,the neighboring villages can see that aschool is being built. Maybe local govern-ment will be looking, so the state moves inand takes over the initiative. Perhaps half ofall projects follow that pattern.

What does a project need to succeed? Projects are successful when they have a lotof stakeholders. Let me explain, taking aneducation project as an example. You needthe children, their parents, the teachers, thereligious leaders, the politicians and in asmall community you also often need a fig-urehead. You have to ask the people in thecommunity what they need; it’s called asset-based community development.

Are microloans a cure-all? Microloans are a particularly good way forwomen to generate income. The best thingabout them is the ownership. The womenwho get the money sign a contract, and theyare responsible as entrepreneurs. Microloanscan help to solve part of the problem, butthey are not a cure-all. You still have AIDS.And there are children who still don’t go toschool or who don’t have mosquito nets.You get back to the basic discussion aboutinternational development...

Which is? Do you have to be healthy to be able to goto school and earn money? Or do you haveto have money so you can stay healthy andgo to school? Or do you have to be educatedso you can stay healthy and earn money?Each project takes a different approach.Microloans tackle income. But there’s also afourth area, climate and the environment.You might have done things perfectly, buteverything you have built up could be wipedout in a rainstorm or an earthquake.

Let’s talk about Africa: is the World Cupgood for Africa? It’s good for the continent of Africa that thespotlight is now on South Africa, so they canshow “we can do it too” and generate con-fidence. But it may well be that black SouthAfrican women see things quite differently…

How is the Optimus Foundation involved inSouth Africa? We deliberately did not want to go into foot-ball. Projects have to last beyond the finalmatch on 11 July, otherwise there is no sus-tainability. In 2008, we started a project toteach hospitality skills to young people withpoor education. The fact that there was a

“South Africa is a role model”

Christoph Schmocker hasbeen the CEO of the UBS Opti-mus Foundation since 2001.Prior to joining the bank, hewas Director for four years atTerre des Hommes, the largestinternationally active children'scharity organization in Switzer-land. He qualified as primaryteacher in Biel in 1985 and as SAWI marketing specialist in 1991.


Invest in Africa · Philanthropy Philanthropy · Invest in Africa

UBS Optimus Foundation: for the good of the childrenThe UBS Optimus Foundation celebrates itstenth anniversary in 2010. It was establishedby UBS on 17 December 1999 as a means ofenabling the bank to participate in charita-ble activities together with its clients.

Our visionWe are committed to the overall wellbeingof children. We work to ensure that childrenand young people throughout the worldhave access to education and can grow upin an environment free from violence andsexual abuse. At the same time, we supporttargeted research to improve the health ofthe most disadvantaged sections of the glo-bal population.

Our mission• We support the development, validation,

promotion and dissemination of innova-tive approaches and ideas to improve theeducation, protection and health of disad-vantaged children throughout the world,irrespective of their political, religious orethnic background.

• To this end, we seek expert partner organi-zations who will act as innovators and are

willing to bring about long-term change.We provide these partners with financialsupport as well as advice where necessary.We actively encourage the transfer ofknowledge and the creation of new net-works between the partners and othersponsors.

• In geographical terms, we concentrate pri-marily on the areas where there is thegreatest need for action in respect of thekey issues defined above, namely the sout-hern hemisphere*. The issue of protectionagainst violence and sexual abuse is alsosupported in northern, western and indus-trialized countries as required.

• As a foundation established by UBS AG,we promote the joint philanthropic com-mitment of clients, managers andemployees. We do our utmost to ensurethat the funds entrusted to us are levera-ged to the greatest possible effect.

• Monies are invested in a targeted anddirect manner, and with UBS covering allthe foundation’s administrative costs,every franc donated goes straight into projects.

Photo: Pierre-William Henry, Neuchâtel

demand for this in the run-up to the WorldCup was a factor behind the success. Today,we are involved in a project to support youngchildren.

How important is South Africa for Africa?South Africa is a role model for other Africanstates. For the western world it’s one of thesafer countries to invest in and is easy torelate to. South Africa has a pretty clear ideaof where it wants to go, and the resourcesto achieve that. The country has relativelygood expertise at the institutional level, gooduniversities and a well-educated elite. Theproblem is that 70% of the population isunable to benefit from this. But thingsshould be different 20 years from now. It isextremely hard for countries that have neverhad an elite to build one up.

If I wanted to start being a philanthropist inAfrica, which country would you recom-mend to me? Philanthropists need to be able to weigh uprisk and return, like any other investor. If youhave never been to Africa, don’t go straightto Mali or Ethiopia, go to South Africa. Thesame applies to donors: it’s best to invest ina country you know a little bit about. SoSouth Africa is one of the countries to rec-ommend, along with Botswana, Ghana andTanzania. We advise against going into con-flict countries.

What are the next steps? We can raise our game. Initially at Optimuswe just supported established aid agencies,as we didn’t want to make mistakes. Todaywe are supporting many much smallerorganizations, offering a much greaterpotential return.

How do you measure and assesshow effective a project is? 1. Quantitatively: You measure howmany children went to school in thepast, and how many do now. 2. What is the impact of improving thenumber? Maybe the province is pre-pared to employ more teachers,because leaders have recognized that80 children are too many for oneteacher. 3. What are the consequences? Teach-ers have to be better trained as the areafor the school and the number of pupilsgrow. 4. What is the impact? The new modelencourages children, so more childrenare educated. The increased prestige ofschools motivates teaches, so the teach-ing quality rises. Within 10 years, mostof the children will have a profession,reducing poverty.

See also: www.ubs.com/optimus

Our funding areas

Education & Upbringing Child Health

Optimus Study

Children

Stop Buruli

Education & Child Protection Global Health Research

Protection from Violence & Sexual Abuse Neglected Tropical Diseases

“Everybody is looking forward tothe World Cup”

Sheila Mokoboto-Zwane, Head of the Southern Africaoffice of the UBS Optimus Foundation, shares theexcitement of the upcoming World Cup in her homecountry: “It's an African, not just a South African WorldCup Competition because it stands to benefit the con-tinent as a whole. It is bringing both blacks and whitesand also rich and poor together. ” Sports promote racerelations and improve learning – a fact that has been

identified and utilized by education projects generally and early childhooddevelopment programs specifically, which is a core area for the UBS OptimusFoundation in Sub-Saharan Africa.

Sheila is convinced that the region is well prepared to welcome fans to thebiggest sports event ever held on African soil. However, will there be a longer-term impact for the region? “Absolutely! Our Tourism and Hospitality indus-try will definitely benefit in the longer term. I hope that visitors will love thecountry enough to return for a longer stay and explore our country’s hospi-tality further, so that they can enjoy our beautiful weather, scenery, and per-haps return for a safari at the famous Kruger National Park or one of the manyother parks we have in the country. Africans will also profit from the improvedroads and infrastructure.”

To avoid “white elephants”, it will be important that people from disadvan-taged regions are able to profit from the newly-built infrastructure and sta-diums, using them for football or rugby clinics and competitions, for exam-ple. A lot of the locals have also been trained in different languages, e.g.,French, German, Italian, Spanish, Portuguese, etc, so that hospitality for WorldCup guests is enhanced. Many local people have added to their skills base bylearning additional languages; this training will remain with them long afterthe 2010 World Cup wraps up.

From 11 June on, Sheila will put on a rainbow-colored football shirt at workand support the “Bafana Bafana” (South African football team). She is alsoorganizing public viewings in townships for people who cannot afford toattend the matches. Sheila adds that Switzerland is her second home, so whenBafana-Bafana is not playing, she will be supporting the Swiss team!


World Cup 2010 · Focus

And the World Champion is…

Focus · World Cup 2010

Back by popular demand, we onceagain open our econometric toolboxand use quantitative models to assessthe likely winner of the upcomingWorld Cup. However, drawing on ourpast successes and especially our pastfailures, this time we are making amore cautious prediction of the tour-nament’s outcome.

During the 2006 World Cup, our model’spredictions were very close to perfect. Ourforecast champion, Italy, which had only anoutsider status among experts, managed towin its fourth title. In addition, our modelcorrectly predicted 50% of the semi-finalists,75% of the final eight and 81% of the final16. This astonishing result led to a ratherlarge amount of press coverage worldwideand earned the inventor of the model his 15minutes of fame on CNN.

We came under tremendous pressure touse the same model to predict the outcomeof the 2008 European Championship, andwe relented – despite reminders that it hasyielded unpredictable results several times inthe past. Who can forget the fabulous runof the Danes in 1992 or the unbelievable winof the Greeks in 2004? Our forecast winner,the Czech Republic, did not even make it intothe second round. Even worse, although ourmodel correctly predicted 63% of the sec-ond-round teams, it forecast none of thefinal four.

The moral of this story is that one needsto be humble about the predictive power ofone’s models. Successful forecasting canoften depend as much on luck as on skill,which is a lesson that is too often forgottenwhen it comes to quantifying the future. Thisshould also serve as a warning to our read-ers: take the following with caution and apinch of good humor. After all, football isonly a game (in most countries).

Given our experience, we have decidednot to go down the perilous path of predict-ing a likely outcome for the whole WorldCup. Rather, we assess the probability ofbeing among the final 16 (i.e., surviving thefirst round), being among the final four and,of course, winning the whole thing.

Unlike in the case of the European Champi-onship, past performance and experiencematter considerably when assessing the fateof a team at the WorldCup. Of the 18 WorldCups, five have beenwon by Brazil, four byItaly, three by Germany,two each by Argentinaand by Uruguay, andone each by Englandand France. Hence, itshould not be a surprisethat picking the winnerout of this small group isa rather safe bet. More-over, Brazil is the onlyteam that has partici-pated in all the WorldCups; Germany andItaly each have missed two. All three teamswere present in the last 12 World Cups.

The number of times those three teamsappeared in the finals is also impressive:seven times for Brazil and six times each forGermany and Italy. It is even more astonish-ing that only six teams reached the last 10World Cup finals: the three aforementioned,Argentina, France and the Netherlands.

Especially worth noting in this context is the2002 World Cup final between Brazil andGermany. What might sound like a classicWorld Cup game was actually a first as both

teams had never met in the 16 previousWorld Cups. However, even more astonish-ing than this oddity was the fact that,according to their Elo ratings (see page 28),the matchup was between the weakestBrazilian and the second-weakest Germanteam ever to participate in a World Cup.

Eight teams had better Elo ratings than Braziland Germany before the 2002 World Cupstarted.

The final four of a World Cup is slightly moreopen than the finalists. Twenty-three teamshave made it to the final four. But here againfive teams (Argentina, Brazil, France, Ger-many and Italy) dominate – accounting for53% of all final four places. Nevertheless, itseems that at every World Cup there is atleast one surprise participant in the semi-finals. In 2006, many saw Portugal in thisrole, although it had been a semi-finalist in1966. Here again, 2002 is especially worthnoticing: Two rather unlikely participants (at

Explanatory factorsAs in our previous studies, we rely exclu-sively on three factors to estimate the dif-ferent winning probabilities: 1) past performance; 2) whether or not a team is a host nation;and 3) an objective quantitative measure thatassesses the strength of each team threemonths before the start of the WorldCup. Socioeconomic factors like popula-tion size or GDP growth have been provento have no explanatory power when itcomes to forecasting the performance ofa specific team.

Forecasting football: more art than science1

Past performance and experienceare indicators of future performance

2

2002 World Cup final (Brazil vs. Germany) was a premiere, not a classic

3

At least one surprise guest in semi-finals4


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World Cup 2010 · Focus


Focus · World Cup 2010

least at first glance), South Korea and Turkey,reached the semi-finals. However, one needsto acknowledge that South Korea had accu-mulated a great deal of experience (five pre-vious World Cup appearances), and was alsoone of two host nations (the other beingJapan).

Being the host nation of the World Cup isobviously an advantage. One-third of allWorld Cups organized so far have been wonby the host. Twelve hosts (63%) havereached the final four and all hosts havereached the final 16 (i.e., survived the firstround, when the World Cup had less teamsthan the current 32). The biggest exceptionsso far was Spain in 1982, which though hav-ing a rather strong team did not manage toreach the final four, and the upset of mightyhost Brazil by tiny Uruguay in the 1950 final. In the same vein as the host advantage falls

the continent advantage. So far, out of the18 World Cups, 10 took place in Europe, sixin Latin America and two on “neutralground” in the US in 1994, and in Japan andSouth Korea in 2002. The score for Europeversus Latin America is nine to nine. LatinAmerican teams have won all the WorldCups held on their turf. European teamshave won nine out of the 10 held on theirs.Brazil is the only Latin American team thathas won in Europe. It has also won twice onneutral ground.

All the historical data in the world cannotturn an uncompetitive team into a winner.Countries that failed to qualify for the 2010World Cup include some traditional footballcountries like Hungary (two times World Cupfinalist), and Sweden (once World Cup final-ist and two times third place), or Russia,

which, taking into account the former SovietUnion, has almost always made it into thefinal 16 (when it was present). But can weobjectively assess the current strength of anational team? One can, of course, take theevaluation of bookmakers as a measure ofsubjective strength. Another alternativewould be to consult the official FIFA rankings.What we prefer to do (as we have in our twoprevious football studies), is to rely on the Eloratings (see box) of the teams in the monthof March preceding the World Cup.

Since 1950 and thesurprising win byUruguay, no team withan Elo rating below1,820 has won theWorld Cup. As men-tioned above, theweakest team (asmeasured by its Elo rat-ing), to win the WorldCup was Brazil in2002. The strongestteam to win the WorldCup was Germany in 1974, followed by Brazilin 1962 and Brazil in 1970. Interestinglyenough, with the exception of Germany in1974, the strongest team going into a WorldCup has never won it.

The most disappointing teams in WorldCup history, i.e., the ones with very strongteams that did not even make it into the sec-ond round were France, Portugal andArgentina in 2002, Spain in 1998 and Italyin 1950. The most surprising teams in WorldCup history, i.e., the ones with rather low Eloratings that made it into the semi-finals,were South Korea and Turkey in 2002(already mentioned above), Uruguay in 1950and Argentina in 1990.

Elo RatingsElo ratings were developed by the Hun-garian-American Physicist Arpad Elo(1903-1992) to measure and rank thestrength of chess players. The ratingshave been used in other sports like ten-nis but especially in football, where theyhave proven to be a better indicator andforecasting tool for determining theobjective strength of teams than theFIFA ranking system. The Elo method forranking football teams not only takesinto account the number of wins, lossesand draws of each team, it also exam-ines the conditions under which thoseevents occurred. As a result, beating astrong team like Brazil or Spain will

improve a team’s Elo ranking much morethan beating a non-powerhouse likeMalta or Andorra. Moreover, for example,winning abroad gains more points thanwinning at home, winning a World Cupqualifier gets more points than winning afriendly, and winning with a score of 5 to0 will give more points than winning by 2to 1. A nice feature of Elo ratings is thatyou can compare the strength of teamsacross times. For example, the Brazilianteam, which won the World Cup in 2002,was significantly weaker than the one,which won it in 1962. You can find the rat-ings at www.eloratings.net.

Historically long odds for thestrongest team 6

The 2010 World Cup, which has an averageElo score for all teams involved of 1,785, isthe weakest World Cup since 1994 (despitethe fact that three teams – Brazil, Spain andthe Netherlands – have an Elo score above2,000. The last World Cup with three suchstrong teams was in 1978 (Brazil, Germanyand the Netherlands). This World Cup willalso host the strongest Spanish team ever to

go to a World Cup,the strongest Eng-lish team since1970, the strongestDutch team since1978, the strongestBrazilian and Ger-man teams since1998, and an Ital-ian team of compa-rable strength withthe one that cap-tured the World

Cup in 2006. Hence, almost all historicalfavorites are traveling to South Africa withvery strong teams, making it very unlikelythat, with the noticeable exception of Spain,we will see a new, fancy World Cup winnerin 2010.

Being host is an advantage5

2010 the weakest World Cup since 1994 7


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World Cup 2010 · Focus Focus · World Cup 2010

Looking now at the likely outcome of theWorld Cup according to our model, tables 1,2 and 3 list the 20, 12 and 8 most likelyteams to emerge from the round of 16,reach the semi-finals and win the World Cup.Despite starting in its own World Cup with amuch weaker team than the two it fielded inits previous World Cup appearances (1998and 2002), South Africa’s status as the hostnation boosts the likelihood that it will makeit into the round of 16. So far, every hostnation has at least moved one round beyondthe first one. Any other outcome would bea huge surprise – even though South Africaenters this World Cup with the weakest Eloranking of any team, even below NorthKorea and New Zealand. Besides SouthAfrica, there is no other African team on thistop 20 list, but teams with a likelihood ofreaching the second round of more than25% are Didier Drogba’s Ivory Coast andSamuel Eto’o’s Cameroon.

This home bias could help South Africa reachthe semi-finals, though we view such an out-come as very unlikely. We are more likely tosee some of the traditional teams in thesemis. Surprises could come from Chile andPortugal and (going beyond this top 12 list),South Korea, the US or Australia, which haverather strong teams, according to their Elorankings.

Country Likelihood to reach the semi-finals

Brazil 49%Germany 38%Netherlands 34%Italy 32%Spain 28%France 22%England 21%Argentina 20%South Africa 17%Uruguay 14%Portugal 14%Chile 13%

Source: UBS Wealth Management Research

Table 2: Semis

Country Likelihood to win the World Cup 2010

Brazil 22%Germany 18%Italy 13%Netherlands 8%France 6%Argentina 5%Spain 4%England 4%


Table 3: Winner

Country Likelihood to reach the round of 16

South Africa 78%Brazil 74%Spain 73%Netherlands 68%England 63%Germany 59%Italy 59%Argentina 55%Mexico 52%Chile 49%France 49%Portugal 47%Serbia 42%Uruguay 42%USA 33%Australia 33%Denmark 32%Switzerland 30%South Korea 29%Paraguay 29%


Table 1: Round of 16

Semi-finals: the usual suspectsplus two surprises9

Out of the top eight contenders to winthe World Cup, six are former winners andthe top three are the usual suspects. Thismight sound boring but, as stated above,past performance is a very strong predictorwhen it comes to forecasting the likely win-ner of a World Cup.

Many readers might feel that EuropeanChampion and secret favorite Spain is under-rated according to this model. Our Englishreaders will certainly feel the same aboutEngland, though here there might be a homebias. The truth is, however, that both teamshave tended to be underachievers when itcomes to the World Cup. In the last threeWorld Cups, Spain and England were rankedamong the strongest teams but did notmake it beyond the quarter-finals. Spain’sbest World Cup result was fourth place in1950. England’s performance at World Cupshas been better, having won it once in 1966and finishing fourth in 1990. Given theobjective and subjective strengths of bothteams and of their respective national cham-pionships, the stardom of many of their play-ers and the football frenzy in both nations,this can truly be seen as an underachieve-ment.

For the sake of keeping the World Cupinteresting and making forecasting its out-come even more challenging, it would begreat if one of those two teams can engineera big surprise in Johannesburg on 11 [email protected]

Chief economist, UBS AG

Round of 16: African teams– except South Africa – cannot

exploit host advantage8

And the winner of the 2010 WorldCup may be Brazil10


Football pundit · Interview


Interview · Football pundit

“Strong coaches and strong managers choose to surround themselves with strong back-room staff”

Urs Siegenthalerhas been chief scout for the German national football teamsince 2005. The former FC Basel and Young Boys Bern playerobtained his coaching certification from the sports university

in Cologne. Siegenthaler'smain job away from football isas an engineer in the construc-tion industry. On August 1,2010, Siegenthaler willbecome the sporting directorat Hamburg SV, specializing insports psychology, team devel-opment, scouting and develop-ing young talent. Parallel tothis, he may continue his rolefor the German national team.

The chief scout of the Germannational team is looking to use strategic thinking to bring football forward. He believes that althoughAfrican national teams are often littered with individual stars, theyoften lack cohesion.

Urs Siegenthaler, can you describe your jobfor us?Urs Siegenthaler: As chief scout for the Ger-man Football Association, I am responsible forwatching players and games on behalf of theGerman national team. I also advise theteam’s coach and his staff; this is now JoachimLöw, previously it was Jürgen Klinsmann.

In German football you have a reputation forbeing an innovator. What do you say to this?I base my approach on football, but notexclusively so. It’s also a question of ethics.

How do we want to appear as a team? Ifsomebody does not wish to abide by certainvalues, he can still go on and achieve success,but I would not want to work with him. Themotto for me and my team is “think like ateam, talk like a team, act like a team”. Infootball, and indeed in many other areas oflife, there’s often a big difference betweenwhat people say and what people do. I placegreat emphasis on strategic thinking and assuch, have created a strategic database. Howdoes a team play, how does a player act,what's going through the mind of our oppo-nent's coach, what formation does a teamuse. I think that these ideas have helped Ger-man football make up a lot of ground onother countries. Looking beyond football, Ialso think that this approach can be appliedto companies.

You were in Angola for three weeks at theAfrican Cup of Nations. How do you see thefuture in terms of Africa's economies andbusinesses?To highlight the problems of Africa andAfrican countries, we can use the Nigeriannational football team as an example. Formany years now Nigeria has produced anumber of outstanding footballers, but thenational team constantly fails to live up toexpectations. I believe that the cultural dif-ferences between the different tribes, cul-tures, family clans and religions are so signifi-cant that it is impossible, or at least very dif-ficult, to create a cohesive footballing unit.There are still “medicine men” who now, forexample, work as lawyers, and have a hugeinfluence on their customers. While there is

only one coach heading up the team, thereare dozens of these ”medicine men” in thebackground, each with a different approach.Such a structure is destined to fail when itcomes to both football and business.

A lot of African footballers ply their trade inEurope and many of them play for top clubs.But, for the most part, African nationalteams have performed disappointingly atpast World Cups. Do you think this generallystems from problems like the ones you iden-tified with the Nigerian team?A coach like Guus Hiddink, who has coachedthe South Korean, Australian and Russiannational sides and can understand differentcultural mentalities, would have the qualitiesrequired to lead an African team to success.A coach has to understand how to deal withthe circumstances in Africa; after all, it is cer-tainly not a lack of quality African playersthat stands in the way of success.

How do you rate the chances of the Africanteams in their “home World Cup?”I doubt any of the teams will be particularlysuccessful. The Africans are beginning toadopt a European approach to the game;they are holding back more, playing a tacti-cal game. Their passion for the game is nolonger there. In terms of the way the gameis played, France has the most influence onAfrican football. The coaches are French, thetraining facilities are set up according to theFrench model and players often begin theirEuropean careers with French clubs. How-ever, I have my doubts as to whether theEuropean model is the best way forward forAfrican football. Another factor is that theWorld Cup in South Africa is taking place intheir winter. Evening games will be played intemperatures of around 6 degrees. At the

African Cup of Nations, games were held in30° heat, something the African players areused to. In addition, the pitches will be wellmanicured – African players may be moreused to playing on bumpier terrain. Further-more, I don’t think that the South Africancrowds will get behind the other Africanteams.

The approach you have brought intoJoachim Löw's team, and previously into Jür-gen Klinsmann's set-up, places more impor-tance on statistics and analysis. Does footballfit neatly into such equations?I want to put people first and then comeback to the relationship between people andtechnology. Employing a scout just to easehis conscience is not enough. A casual con-certgoer can’t recognize if a violin plays anote a second too late. The same applies toscouts. Not all scouts can correctly apply theanalysis programs that all teams now useand draw the right conclusions. They are notall able to recognize what a player can andcan’t do and whether he can be coached todo something different. It is even more diffi-cult to analyze entire teams and playing sys-tems. And you also need people to receivethis information, who are prepared to take iton board and implement it.

Does the German team now play differentlyagainst certain opponents than it did fouryears ago because you have been able toobserve and analyze these teams better?Of course you always need players who canput these demands into practice on thepitch. Any coach can tell his team to “get outthere and score some goals”, but workingout how to do this is a completely differentthing. The art of a coach or manager is beingable to recognize “what can I ask my play-


Football pundit · Interview


Interview · Football pundit

“Five years is a long time in football –but not in wealth planning”

ers to do, what will they understand, andwhat can they go out and do on the pitch?”Despite what everyone says to the contrary,I still believe that nobody is more intelligentthan a football player. Footballers have tomake decisions in a fraction of a second,adapt to new situations, keep their eye onthe ball, and they must do so while underconstant physical exertion. However, thisintelligence is often limited to the playingfield; as we’ve seen many times in the past,many footballers have trouble coping withthe simpler things in life.

Will this systematic entry of data result in“play books” becoming the norm in foot-ball?Football still lags behind many other sportsin this respect. These sorts of “automatedplays” work relatively well in terms ofdefense, but going forward this is not thecase; this is because football – and this iswhat I think is part of the beauty of the game– is only predictable up to a certain point andthis is likely to remain the case for now.Improvisation continues to play a key role.

You have a lot of contact with footballers.How do you go about looking after thesesportsmen, many of whom are still veryyoung? Do the players, many of whom earnmillions, know what to do with their money?Unfortunately I often see things end in tears.A lot of players are paid too much moneywhen they are very young, and by very youngI mean they are often under twenty. A lot ofplayers come from humble backgrounds andtheir families are not used to dealing with somuch money. It is often the father or anotherfamily member who manages the player'sfinances even though they are not equippedto do so. I think that in these cases, the clubs

should at first assume some responsibility.However, they are nowadays often unable todo so as the connection between club andplayer is no longer what it once was.

You have seen and got to know a lot ofcoaches. What makes a successful coach?A good coach, and indeed a good manager,must have excellent social skills, empathy,specialist knowledge and a high level ofexpertise. He must be able to gauge the abil-ity of this team and his staff and should notbe dictatorial, he must listen to those aroundhim. Strong coaches and strong managersalso choose to surround themselves withstrong back-room staff.

What makes a complete footballer?Talent isn’t just about shooting at goal. Trulytalented players set themselves goals in train-ing – they understand them, take them onboard, train towards them and put them intopractice on the pitch. In addition they arestrong leaders. Their presence elevates thelevel of their teammates. This is also thesame in business.Interview: [email protected]

Investment writer, UBS AG

According to “France Football”, Barcelonaand Argentina star striker Lionel Messi is saidto have earned EUR 33 million in the lasttwelve months, making him the game’s high-est earner. But not all professional footballersare as exceptionally gifted as Messi, and assuch do not earn anywhere near as much asthe 2009 FIFA World Player of the Year.

Nevertheless, almost all professionalsplaying top-flight football in Europe or LatinAmerica will earn the majority of their life-long income between the ages of 20 and 35.And even this is conditional upon avoidingmajor injuries and maintaining the sort ofform needed to play at the highest level.

Footballers must therefore be particularlycareful when it comes to financial planning.Raphael von Arx, a UBS client advisor forSouth America in Basel, has a client portfo-lio including two dozen professional foot-ballers, whom he has known for many yearsand with whom he enjoys a special relation-ship.

Uncertain economic situation back home“Most South American and African foot-ballers come over to Europe when they arestill very young,” explains von Arx. “It is usu-ally their first time abroad and they oftencome from humble backgrounds.“ However,the players are well aware that they are notguaranteed to earn astronomic sums. Bankadvisors try to show players that they shouldsave and invest some of the money they earntoday for their lives after they have retiredfrom the game. Players from countries withunstable currencies and weak economies are

often suspicious. For many of them, a periodlonger than five years is an eternity and theyoften worry about how secure their invest-ments will be. They would prefer to haveeverything in cash, with some of their assetsinvested in real estate.

It is the client advisor’s responsibility toshow them that by holding cash, they aremissing out on the often higher returnsoffered by other asset classes and thatdepending on the market and currency, andgiven the uncertain length of their career atany one club in a particular country, buyingreal estate may not always make sense.Bankers often continue to advise footballerson their finances even after they have retired.A player returning home to Argentina aftera playing career abroad who is about to retirehas already invested in a real estate projectthat is performing well.

Von Arx believes that most footballers areresponsible with their money, even if theyperhaps occasionally splash out on a sportscar, which given their income is still wellwithin their budget. “Many players supporttheir relatives in Africa or South America.”Almost all players advised by von Arx do notemploy agents when it comes to their finan-cial affairs, even if they have an agent forother matters, such as contract negotiations.

The biggest difference between foot-ballers and other clients is their income pro-file. Nevertheless, they ultimately have thesame financial goal. They are looking for safeinvestments that provide a steady return. [email protected]

Investment writer, UBS AG


Economics of Football · Africa Africa · Economics of football

Muscle drain or muscle gain?

If more African football players playfor European clubs, does it fosterdevelopment in Africa, or does itdeprive the continent of its talent?

In 1889, Rotherham Town Football Clubrecruited Arthur Wharton as the firstAfrican professional football player undercontract with an English club. At the time,football was widely unknown on theAfrican continent, but the talents of its ath-letes were quickly acknowledged by thecolonial powers: Over the next decades,several Africans played in Europe especially

in the French and English football leagues.Today, a much larger number of Africansplay in Europe, and also in the United Statesand in Asia. Several of them have made itinto Europe’s top teams, includingCameroonian Samuel Eto’o at Inter Milan,Ivorian Yaya Touré at FC Barcelona, and Ivo-rian Didier Drogba and Ghanaian MichaelEssien at FC Chelsea. Almost all players ofAfrican national teams are currently undercontract with clubs in Europe, while hardlyanyone plays in Africa.

Looming conflicts: Muscle drain?Some critics have raised concerns aboutsuccessful African players becoming lesswilling to play for their national teams,because, for instance appearances inEurope’s prestigious Champions League aremore lucrative. Such potentially conflictingcommitments are only the tip of the icebergof criticism of “muscle drain” out of Africa.Allegedly, especially when they first come toEurope, African players in European leaguesare often employed under unfavorable con-ditions compared with other players, scoutsexploit the lack of experience of youngAfricans to reap the benefits from trans-fers, and local teams in Africa have nomeans to compete for talent – a practicethat FIFA president Sepp Blatter in 2003denounced as “neo-colonialism” and “rob-bing the developing world of its best play-ers.” Very few of the top African players arestill under contract on their home conti-nent, which is one of the reasons for thelow attractiveness of African leagues forfans and sponsors, decreasing revenues andmedia attendance for local clubs. This trendis self-reinforcing: The less attractive the

African leagues, the less African players willbe willing to stay in Africa.

Arising opportunities: Muscle gain?At the same time, however, there may wellbe “muscle gain” associated with Africanplayers under contract abroad: The growingsuccess of African national teams in the lastdecade has been fostered by the transfer ofplaying techniques and skills that playersacquired by playing for international topteams. Prominent African players have alsohelped open an increasing number of foot-ball training schools and academies inAfrica in which young talent is promoted.Such schools also provide formal education,advise players to not solely rely on footballas a future occupation and offer a perspec-tive besides sports. Generally, the exampleof successful Africans in Europe may inspireyoungsters in Africa to strive for a similarachievement by training hard. Winning anengagement with a European club presentsa way out of poverty for each individualAfrican player, but their financial remit-tances to Africa are also being felt in play-ers’ families, communities, home clubs, andso on. Lastly, the success of African playersabroad has created pride and a sense ofidentity with many Africans – often feelingthe stigma of poverty, their soccer stars arepositive examples of achievement.

More like Brazil: Have players abroadAND win World Cup titlesNot only African players strive to succeed inthe European leagues: For instance, ofBrazil’s current squad, only a handful ofplayers are under contract with clubs inBrazil, while the vast majority plays inEurope. For Brazil, this does not seem tohave lessened the national team’s success:

Brazil is the most successful national teamin the history of the World Cup and a five-time winner.

While not having won a World Cup yet,African national teams have had somenotable successes in international tourna-ments in recent years. As a positive exam-ple of the promotion of young players inAfrica, Ghana won the Under-20 WorldCup as the first African team in 2009, andNigeria was the runner-up at the Under-17World Cup the same year. Following theparticipation of several North Africanteams, World Cups in the last two decadesalso saw a number of debuts of teams fromSub-Saharan Africa. Having qualified forthe first time, Senegal achieved a surprisesuccess in 2002 by beating the reigningFrench world champions and reaching thequarter-finals, being only the secondAfrican team to rank among the final eightteams since Cameroon in 1990. Now, ifAfrican national teams could follow Braziland make even better use of the skills andexperience that their players acquire in theworld’s best clubs, then, yes, one of thenext football world champions may well bean African team…[email protected]

Analyst, UBS AG



Economics of Football · Valuation Valuation · Economics of Football

Money can buy you a Ronaldo, but not a World Cup

At its best, a football team is more thanjust 11 players. Comparing the teams’sporting quality with the aggregatedtransfer values of their players, we findthat England’s team is most overvalued,whereas the US boys offer the highestquality for money. At least since Spanish football club RealMadrid paid a record EUR 94mn for Por-tuguese superstar Cristiano Ronaldo, it hasbecome obvious that there is real moneyinvolved in the world’s most popular sport.Sky-high transfer fees and salaries, however,do not always translate into championshiptitles. For Real Madrid, the investment seemsto be paying off nevertheless, at least com-mercially.

Bread and circusesWhile Spain is in a severe recession,

Deloitte just crowned Real Madrid the high-est revenue generating sports club in theworld, recording revenues in excess of EUR400mn in the last season. This contrasts with

its sporting successes, which have beenbelow the club’s own expectations duringrecent years. According to the study, rev-enues of Europe’s top soccer clubs grew bymore than 220% since 1997, with broad-casting revenues being the main driver. AsSpain’s unemployment rate has risen from8% in 2007 to 19% now, one would expectmatch day revenues to collapse. Instead,attendances in Real Madrid’s Santiago Bern-abéu stadium and Barcelona’s Camp Nouhave so far been higher on average thanbefore the crisis. Bread and circuses, theRoman poet Juvenal once said. His words stillseem to hit the nail on the head.

Champions on paperIt is widely recognized that at its best, a teamis more than just 11 individual players. Eng-land and Spain, for example, often had sev-eral of the world’s top players in theirnational teams. However, since winning theWorld Cup in 1966, England only once madeit into the semi-finals (in 1990), beingdefeated by Germany. Spain’s World Cuprecord, despite its recent win of the Euro-

pean Championship title, iseven worse: only once reach-ing the final four back in1950.

The big mismatchIn order to understand thedistinction between a team’s

sporting successes and the market value of itsplayers (the sum of estimated transfer valuesof the individual players), we have tried to cal-culate the ’fair value’ of the world’s top 100national teams. By ’fair’ we mean the price ateam should have, if we only consider vari-ables related to its sporting quality, like pre-vious successes, current ranking, and theaverage age. In our model, these variablesexplain roughly 70% of the aggregated mar-ket value of the teams. For the 31 teams1 thatqualified for the World Cup, Fig. 1 shows thedifference between the current transfer valueand the ’fair value’ of the average player in ateam. The results confirm some of the anec-dotal evidence: England has the most over-valued squad, followed by France, Argentinaand Spain. In contrast, the US, Greece,Paraguay and Mexico have the most under-valued, or ’quality-for-money’ teams.Whether or not this will help the US to defeatEngland in their group stage clash is a differ-ent question though.

Expensive Spain, efficient GermanyRunning a similar model for Europe’s 100most competitive clubs – taking UEFA’s teamranking as the yardstick – our model sug-gests that the top clubs in Spain’s PrimeraDivisión are, on average, the most overval-ued, whereas the best teams in Germany’sBundesliga and in the French Ligue 1 appearto invest their money more successfully onaverage, from a purely sporting perspective.

Chicken or egg, money or superstarOn an individual club level, the German Bun-desliga stands out as combining commercialand sporting successes, with FC BayernMunich, Hamburger SV and Werder Bremen

belonging to both Europe’s most underval-ued and top-earning clubs according toDeloitte (Fig. 2). In contrast, Real Madrid,Manchester City and Juventus are the mostovervalued clubs. Most of them, however,successfully capitalize on the commercialvalue of their exclusive squads, also belong-ing to the highest revenue-generating clubs.Money attracts superstars and superstarsattract money, and at least in the short tomedium term, lacking top sporting perform-ance does not seem to spoil the party, as RealMadrid showed during recent years. Otherclubs, like Manchester City, bridge financialgaps by relying on wealthy patrons. As longas money keeps on rolling in, in one form oranother, we would not be surprised to readabout new record-high bids for the world’stop players in the years [email protected]

Analyst, UBS AG

1 Data for North Korea was not available.

2.5

1.5

2.0

0

1.0

–1.0

0.5

–0.5

–1.5

Source: FIFA, UEFA, transfermarkt.de, UBS WMR, as of March 2010

Engl

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Data for North Korea was not available

Fig. 1: Brand it like Beckham

–1.0 –0.5 0 0.5 1.0 1.5 2.0

Source: UEFA, transfermarkt.de, Deloitte, UBS WMR, as of March 2010

Werder Bremen (17)Hamburger SV (11)Arsenal (5)Newcastle United (20)Bayern Munich (4)Olympique Lyonnais (13)Liverpool (7)Manchester United (3)Olympique Marseille (14)AC Milan (10)

Schalke 04 (16)AS Roma (12)

Chelsea (6)Borussia Dortmund (18)Tottenham Hotspur (15)

Internazionale (9)FC Barcelona (2)

Juventus (8)Manchester City (19)

Real Madrid (1)

Numbers in parentheses indicate the club’s revenue ranking in the 2008/2009 season according to a Deloitte report

Fig. 2: German efficiencyOver- and undervaluation of the average player in Europe’stop revenue generating clubs (in mn Euro)

Over- and undervaluation of the averagenational team player, in million euros.

Publication data · Appendix

PublisherUBS AG, Wealth Management Research P.O. Box, CH-8098 Zurich Editorial teamAndreas Höfert, Editor-in-ChiefSimone Hofer Frei, Deputy Editor-in-ChiefPierre Weill, Deputy Editor-in-ChiefViviane Vajda, Martin Haas Product managementChristian Burger

TranslationsCLS Communication AG, Basel Desktop publishingWerner Kuonen, Rolf Müller, MargritOppliger, Linda SutterPrintingNeidhart+Schön AG, Zurich [email protected] SAP No. 82067E-1001 Special issue

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Appendix

How large is Africa’s share of the global population?

� A 8.9%� R 14.7%� N 21.3%

Which river has the potential to provide energy for the world’s largest hydroelectric power station in the future?

� I Congo� U Nile� E Amazon

How many independent countries make up the African continent?

� N 26� E 37� O 53

Who is South Africa’s biggest trading partner?

� P USA� B European Union� D China

How large is Africa’s share of global oil production?

� E 12%� S 5%� C 2%

Which country is the world’s biggest producer of gold?

� O South Africa� J China� I USA

Which country has qualified for all World Cups to date?

� I Italy� N Germany� A Brazil

Which small country unexpectedly beat the mighty Brazil in the legendary Maracanã Stadium in Rio de Janeiro to win the 1950 World Cup?

� N Uruguay� S Bolivia� R South Korea

Which team at the 2010 World Cup is the most overvalued (based on past success in relation to the estimated transfer value of its players), according to estimates by Wealth Management Research (WMR)?

� B Germany� R Switzerland� E England

Which team at the 2010 World Cup is the most undervalued (based on past success in relation to the estimated transfer value of its players), according to estimates by Wealth Management Research?

� I USA� S Spain� P Argentina

Which African team does Wealth Management Research predict has the greatest chance of reaching the semi-finals?

� R South Africa� E Ivory Coast� B Cameroon

Where will the final on 11 July 2010 take place?

� S Cape Town� O Johannesburg� P Pretoria

According to UBS Chief Economist Andreas Hoefert’s prediction, in which city are the celebrations for the 2010 World Champions likely to be most fervent?

HHHHHHHHHHHHHHHooooooowwwwwwwwwwwwwwww llllllllllllaaaaaaaaaaarrrrrrrrrrrrggggggggggeeeeeeeeeee iiiiiiiiissssssssssssssss AAAAAAAAAAAAAAAAAAAAAAAAAAAAAffffffffffffffffrrrrrrrrrrrrriiiiiiiccccccccccccccccaaaaaaaaaaaa’’’’’’’’’sssssssssss ssssssssssssshhhhhhhhhhhhhhhhaaaaaaaaaaaaaaaaaaarrrrrrrrrreeeeeeee ooooooooooooooffffffffffffffffff tttttttttttttttttthhhhhhhhhhhhhhhhhheeeeeeeeeeeeeeeeeeeeeee ggggggggggggglololololololololololololloololll bbbbbbbbbbbbbbbbbbbbbbbaaaaaaaaaaaaallllllllllllllll pppppppppppppppopopopopoopopopopopopopopopoppoopoooppuuuuuuuuuuuuuuulllllllllllaaaaaaaaattttttttttttiiiiiiiiiiiiiiiooooooooooooonnnnnnnnnnnnnn????????????????????

Which team will be crowned 2010 World Champions?

fffffffffffffeeeeeeeeeeeeeeeeeeeeeerrrrrrrrrrrrrrrrrrrrrrvvvvvvvvvvvvvvvvvvvvvveeeeeeeeeeeeeeeeeeeennnnnnnnnnnnnnnnnnnnnntttttttttttttttt?? ?? ????????

❚ ❚ ❚ ❚ ❚ ❚ ❚ ❚ ❚ ❚

❚ ❚(The solution is made up of the

letters of the correct answers)

Quiz answerThe letters of the correct answers spell out the solution word RIO DE JANEIRO.



A 8.9% R 14.7% N 21.3%

Which river has the potential to provide energy for the world’s largest hydroelectric power station in the future?

I Congo U Nile E Amazon

How many independent countries make up the African continent?

N 26 E 37 O 53

Who is South Africa’s biggest trading partner?

P USA B European Union D China

How large is Africa’s share of global oil production?

E 12% S 5% C 2%

Which country is the world’s biggest producer of gold?

O South Africa J China I USA

Which country has qualifi ed for all World Cups to date?

I Italy N Germany A Brazil

Which small country unexpectedly beat the mighty Brazil in the legendary Maracanã Stadium in Rio de Janeiro to win the 1950 World Cup?

N Uruguay S Bolivia R South Korea

Which team at the 2010 World Cup is the most overvalued (based on past success in relation to the estimated transfer value of its players), according to estimates by Wealth Management Research (WMR)?

B Germany R Switzerland E England

Which team at the 2010 World Cup is the most undervalued (based on past success in relation to the estimated transfer value of its players), according to estimates by Wealth Management Research?

I USA S Spain P Argentina

Which African team does Wealth Management Research predict has the greatest chance of reaching the semi-fi nals?

R South Africa E Ivory Coast B Cameroon

Where will the fi nal on 11 July 2010 take place?

S Cape Town O Johannesburg P Pretoria

According to UBS Chief Economist Andreas Hoefert’s prediction, in which city are the celebrations for the 2010 World Champions likely to be most fervent?


Which team will be crowned 2010 World Champions?

likely to be most fervent?

❚ ❚ ❚ ❚ ❚ ❚ ❚ ❚ ❚ ❚

❚ ❚(The solution is made up of the

letters of the correct answers)

ubs africa 2010

Documents

ubs wealth

ubs financial services

football world cup

ubs optimus foundation

world cup muscle drain

publication isavailable

south africa economy

africa overview