finance

Spread Betting on the World Cup

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Brazil 2014. The most anticipated footballing event of the sports calendar is just around the corner. The World Cup which by God’s grace, Nigeria will be crowned champions18 years on from their Olympic football gold medal. I’m sure readers of Lekanomics (link to his blog) will not be too happy with that!

A World Cup betting report by Regulus Insights has predicted around £800 million pounds worth of stakes will be placed during the World Cup. This is most likely down to the wide range of betting options available for punters to select from as they ponder on where to put their money.

The spread betting markets is an extension is this betting craze. Punters can bet on things such as, the shirt number of a goalscorer, to which two teams will make the World Cup finals and even the total amount of yards accumulated by the number of goals scored throughout the tournament.

Let me explain how the spread betting market works.

Let’s use the total corners market as an example. Currently, this market is being quoted at 643-653. What this means is that you can decide to ‘sell’ at 643 or ‘buy’ at 653.

If Josh Capital believes there will be more than 653 corners in the tournament he will buy at 653, equally, if he thinks there will be less than 643 corners he will sell at 642. What does that mean in practice?

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As you can see in the diagram above, the market can be highly leveraged and an investor’s mentality should be applied – only stake what he/she sees as as a comfortable amount to lose. Take a long term approach to the tournament – assess how the favourites (and England) perform, the leniency of the referees and other factors which could affect the final scoreline.

Good luck to everyone who has money on the tournament – let me know how well you do!

@capitalmoments

One to Watch – SONY

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SONY announced plans this week to enter into a Joint Venture with Shanghai Oriental Pearl, a Chinese State owned media company to facilitate the manufacturing and selling of the PS4 to a fraction of 1.3bn potential new consumers. I know some of you are wondering why this is such a big deal. Well, for the past 14 years in Mainland China there has been a ban on foreign made games consoles being sold to the citizens of the country. This was ended in January and now it seems like SONY want to tap into the Chinese gaming market – a market which saw revenues grow 38% year on year to $13.75bn, the largest growth rate since 2009 according to the China Games Industry Annual Conference.

Firstly lets look at how those revenues are broken down:

•65% is derived from client-based PC games
•15% is down to online browser-based games
•Mobile gaming accounts for 13.5% (with Apple’s iPhone and iPad take a quarter of Chinese      
mobile games revenues) and finally
•6.5% are as a result of the sales of Game consoles 

Is this a good move for SONY? No doubt about it – 100% yes in my opinion. There is a huge multibillion that can be tapped into legitimately (Playstations and Xbox Consoles have been available on the black market in the country for a very long time at over inflated prices) and could lead to long term strategic growth for the company. Microsoft are one step ahead of SONY after they announced their Joint Venture with BesTV New Media and have plans to launch the Xbox1 in September. The advantage SONY have on their American competitors is their price to value. They have been able to offer a console roughly £100 cheaper without compromising on the main specifications of the console. The value for money obtained if translated into sales could prove very profitable for the company in the long run. There is a huge market of multiplayer online role-playing gamers in the country for console producers to tap into – 129 million to be precise which accounts for 73% of all Chinese gamers. Games such as Final Fantasy proving to be best selling RPG’s on previous consoles, so if SONY can repeat their success with upcoming games the future looks bright for the company. How has the markets reacted to the news? As you can see on the below chart the share price went up by 3% when the news was announced so it was definitely viewed as a positive signal.

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It will be interesting to see how this developes over the next year or so – will SONY be able to break into the Chinese gaming market? Only time will tell.

@Capitalmoments

The most lucrative game in football

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Before you read on ask yourself the following two questions. Would you rather be an unused substitute in the Champions League Final or score the winner in the Championship Playoff final? then ask yourself this which club would you rather own – the runner up in the Champions League Final or the Championship Playoff final winners?

This Saturday 2 football finals will be played, both having monumental levels of importance for different reasons. Firstly and in the eyes of the majority more importantly, the Champions League Final will be played between the two Madrid rivals – Real and Athletico. Who will be crowned the best team in Europe? Secondly we have the Championship playoff final between Derby and QPR to see who will be the third promoted club to the Premier League alongside Burnley and Leicster. Congratulations to all 4 clubs and the best of luck in their respective games…

But lets get into this post. You must think I’m crazy for even mentioning the latter two clubs in the same sentence as the madrid heavyweights, but this saturday in my eyes they will be just as if not more important for financial reasons. The Championship play-off final is the most lucrative one-off fixture in football and sport more broadly, and this year its more expensive than its ever been. It is an astounding 90 million more than second place – Floyd Mayweather’s earnings of £48m which he obtained fighting Canelo Alvarez last year, and 13 times the £10m you obtain for winning the Champions League! This figure could even get better as this accounts for the worst case scenario of relegation straight after promotion. There is a lot at stake literally and the pressure will be on both teams to secure their place with the big boys next season.

Let me break down this figure to see how it all adds up.

•£62m of Premier League prize money even if finishing bottom of the Premier League next season

•£72m over four years which is expected to be made up of parachute payments of roughly £26m in 2015-16, £22m the following year, and £12m in each of the two years after that. This almost certainly will rise if the club doesn’t get relegated due to the continual evolution of the Premier League brand as it looks to rubber stamp its position as the best league in the world which will translate into increased earnings via TV income, Sponsorship contracts and match ticket prices

it is true that the step up requires heavy investment into the squad through transfer fees and wages (but in Derby/QPR case FFP regulations will prevent them from going overboard: see here and here) however that is not always the case for all promoted clubs. Let me use Southampton to make my point….

Key financial highlights for Southampton:
•Total revenue increased 213% to £71.8m (2012: £22.9m) with average league attendances up from 26,427 to 30,807
•Broadcasting income grew from £5.6m in 2011/12 to £46.9m in 2012/13
•Matchday income of £11.8m in 2011/12 has risen to £16.9m in 2012/13
•Commercial income increased from £4.8m in 2011/12 to £6.7m in 2012/13
•The loss before interest and tax has reduced to £6.6m (2012: £11.9m loss)
•Total group wages, including player wages, increased to £47.1m in 2013 from £28.7m in 2012
•Expenditure on the total training ground project now anticipated to exceed £30m. The first phase of the build is expected to open this summer

From the highlights above we can see how much of a positive impact being in the premier league has has on finances, but also on the long term strategy to the club by actively investing in improving the training facilities – something they probably wouldn’t have been in the position to do a few years back when they were in the 3rd tier of English football.

However you look at it, winning the play-off brings a massive windfall, a windfall that next season will be £134m…. Now ask yourself the same two questions I wrote at the beginning of the article and see whether your answer changes. Mine did!

@CapitalMoments

Mortgages: if it wasn’t hard enough already…

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Following the 2008 financial crisis, the Financial Conduct Authority (FCA) took a detailed look at the mortgage market with a view to address what has been seen in the past as irresponsible lending practices. As a result, on the 26th May individuals in the UK get a mortgage changed and new rules introduced by the FCA have now come into effect.

Going forward, lenders of residential mortgages will have to demonstrate that they have taken appropriate steps to ensure the borrower can afford the mortgage not just at the time of application but also if interest rates were to go up in the future. There will also be much more focus on the individuals expenditure as well as income and more supporting evidence will now be required. As a result, mortgage applications are going to take longer and any potential interest rate rises would be negatively correlated with the amount of money. It would be interesting to see if the amount of mortgage applications spike up this month to avoid the impending regulations – I would assume so. What surprises me is why wasn’t this introduced earlier? A major contributor of the crisis back in 08 was the greed of mortgage brokers who were arranging sub-prime mortgages for any Tom or Jerry who could barely afford their mortgages at the time and became screwed when rates rose. This change in my opinion comes a few years later than it should. It will also be interesting to monitor the next quarter how the number of mortgage applications is affected, and whether there is a spike in the amount of joint mortgages obtained in the UK (whether that figure is available is another issue). I would expect to definitely see an increase due to additional checks which will be implemented making it even harder to obtain a mortgage. As if it wasn’t hard enough already!

What effect may this have on property prices you may wonder? I believe it won’t. There will be many individuals who may now become priced out of buying in a very over saturated market, but prices will continue to rise as overseas investment in UK properties continues to pick up. How does that affect you and I? Well the stringency in the long term would be beneficial to us as the unfortunate scenario of property repossession is taken into account, however in the short term it is a pain. Future income (fixed and/or variable) is hard to predict; so over cautious mortgage lenders may affect the chances of an individual stepping on the property ladder.

Watch this space.

@capitalmoments

What’s PSG to a City like me

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There’s a new term which is taking the football world by storm – no it’s not Crystanbul it’s FFP, otherwise known as Financial Fair Play. This week Manchester City rejected the punishment equating to 49 million and a 21 man squad size restriction proposed by football’s European governing body UEFA for breaking the FFP rules. Before I start I’d like to congratulate Manchester City on winning another Premier League title this season – a fantastic show of mental and technical ability over the course of the 38 game marathon.

I’m not going to go in to too much detail Lekz has already done so here but I will focus on the FFP’s definition of the ‘valuation’ of a footballer.

“Financial Fair Play is intended to improve the overall health of European club football” – FIFA

Ok the above definition doesn’t really give much away. But let’s not talk Barcelona let’s talk business. I would define a healthy business as a business that has a solid current/acid test ratio. Simply speaking that means that their Assets can, in a worst case scenario pay off all the liabilities. Now let’s transfer that to football. Financial health is defined in a nutshell by spending within your means – so clubs can’t spend ‘much’ more than what they make. The rules have been drawn up to primarily avoid another Portsmouth/Leeds situation and secondly try to even out the playing field and increase competition. This is not a knee jerk reaction by the top dogs; it had been on the pipeline for years and it’s importance should not be dismissed. Something needed to be done to ensure that the astronomical fees and wages received do not become over-inflated.

Clubs with poor financial management aren’t expected to work miracles overnight also – the rules will be phased in over the following years to come. By 2018, it is expected that clubs would only be allowed to make losses amounting to 25million. But that being said, projects relating to youth development and infrastructure amongst other things are exempt from the rules. Also the value of a player (Asset) who is bought is amortised over the life of his first contract. Let me explain…..

Arsenal sign Josh Bright from Capital Moments FC in the summer of 2014 for 100 million on a ten year contract. Arsenal agree with Josh to pay him 5 million a year. That means that every year for the next 10 years he will cost

100million(value of transfer)/10years= 10m + 5million = 15 million each year. The longer an asset is held the more it depreciates (loses value). The FFP’s definition of the ‘value’ of the player in 2014 is 15m, even though he was bought for 100m.

If however 6 years through Real Madrid decide to put in a 72.5m offer for Josh, Arsenal now have to pay up the remaining amount due to Capital Moments FC and account for any unpaid wages that need to be reported. If he left in the January window I.e half way through the season, Arsenal would make a profit of
72.5m – 40m (remaining amount due) – 2.5m (half of Josh’s wages for the season) = 30m

Simply put the way that annoying uncle that always comes over to watch football at your house because he removed his sky subscription explains players values is very likely to be different to the FFP definition. The length of a contract and the wage bill of clubs are just as important as the agreed transfer figure.

It will be interesting to see how the FFP develops. From the outset it looks like a great idea to ensure the long term stability of football clubs – the FA have implemented the FFP all the way down to League 2. An issue I see straight away is that many clubs, especially the privately owned ones may continually attempt to game the system. There will be a lot of investment by some of your bigger clubs into finding loopholes in rules implemented. Both Manchester City and PSG are believed to have broken the FFP rules with sponsorship deals related to each clubs’ owners.

Abu Dhabi-owned City have a £40m-a-year deal with Etihad Airways, while Qatar-owned PSG have a backdated deal with the Qatar Tourist Authority worth up to (£165m) a year, which UEFA valued at about £100m. To be honest putting a valuation on these deals will be very difficult, however UEFA feel that these clubs are using affiliate sponsorships to get around the FFP, creating a sense of an indirect financial doping issue.

Another question I do have is whether the fixed depreciation on the value of a player each year is the best method. Players peak at different ages depending on the position they play, and the value they may contribute to the club in year 2 may be very different to the value in year 5. But then judging the “market value” of a player is like beating me of FIFA on the PS4 – Impossible!

I will be going on @Thetopcorner to talk about finance in football so watch out for that soon! Capital Moments website coming soon also…

@capitalmoments

Nigeria – GDP or Greed?

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Before I go into my post I’d like to wish the safe return of the 234 Nigerian schoolgirls kidnapped by Boko Haram – this devastating act doesn’t in my opinion seem to be getting the focus that it should be, however God is in control. #bringbackourgirls
Nigeria replaced South Africa as the Largest Economy in Africa, after the government revamped the way they calculated the GDP of the country. the figure now stands at $510bn, nearly double the $260bn amount provided in 2012. This is down to the recognition of New industries in the rebased calculations including: food, beverages and tobacco, chemical products, pharmaceutical products, arts and entertainment. Nollywood, the Nigerian movie industry produces more films a year than any other country except India. There are up to 120 million mobile phone subscribers  in a country of around 170m people, and dozens of providers which is remarkable considering Only 20 years ago, Nigeria had one telecoms operator and around 300,000 telephone lines. 
This apparent diversification of the Nigerian economy has eased the pressure on the volatile Oil and Gas industry to perform as it has been doing for a long time now. Before the rebasing, the share of crude oil and natural gas to the nominal GDP was 40.86 percent in 2011 – this figure is now 14.4% for 2013. Their investment uncertainties surrounding the industry down to the impending regulatory changes (the Petroleum Industry Bill) and growing issues around oil theft which have delayed exploration projects which were to be implemented to assist the country in increasing Oil production.
Ratings agency Moody’s published a statement on Nigeria’s rebased GDP of $510 billion, which it estimates would surge to $4.5 trillion by 2050 – however in my opinion this still papers over the cracks that have hindered the country for so long and will continue to hinder the country if nothing is done to stop it. The economy is booming with billions of dollars worth of investment flowing in to the country annually and year on year economic growth has nearly doubled – however there is a sense that the bottom line do not seem to reap the rewards of their labour. Corruption and financial mismanagement have kept the benefits from trickling down. Why is it that although the country now has the largest economy in Africa they are number 3 on the World Bank Poverty Index? Why did World Bank Country Director, Marie-Francoise Marie-Nelly claim last year that 100 Million Nigerians were living in destitution? Why is my cousin constantly having to save his career mode on FIFA after every game because he’s scared that NEPA will strike and electricity will cut out? Why is the country’s infrastructure still lacking? What steps are being taken to eradicate the evolving threat posed by Boko Haram? These are just a few of many questions that need answering…
The general consensus is that the current administration of President Goodluck Jonathan has not done enough to improve the welfare of Nigerians since taking over from the late Umaru Yar’Adua in 2010. Earlier this year Mr. Jonathan lost public and investor confidence in the country by firing the respected head of the central bank, Lamido Sanusi, the first time this has happened in the country’s history (Check out the full story here). This reinforced suspicions that the lost money to the account of $20bn which could have been spent improving the economy further was shared amongst politicians.  It seems like the country has the classic problem of inequality – the rich are getting richer and the poor are getting poorer. More than 60% of Nigerians live of $1 a day – that’s crazy. 
Something needs to be done and fast if the country wants to realise the potential it has. 

@capitalmoments

The economic recovery – Return of the pound?

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The economic outlook of the UK has had an impact on the Foreign Exchange markets. The pound sterling is strengthening against many currencies in both the developed and emerging markets however in this blog I’m going to focus on the relationship between the pound and the dollar and the positives/negative impacts as a result of this. First of all what does it mean for the pound to strengthen against the dollar? Basically you get more dollars for every pound when you go to exchange it at your local bureau. What has caused this in the markets? Well it is a combination of the following – the outlook on monetary policy and economic recovery.

Monetary policy in a nutshell is the setting of interest rates. The Bank of England Base Rate has been set at a record low 0.5% for 5 years now primarily down to the recession that had plagued the country for years. This was to enable businesses (and banks) to borrow from banks to fund operations and create new employment opportunities to compensate for all the jobs lost during the difficult period post 2008. In 2009 GBPUSD was trading at 1.3505, a 23 year low! The Bank of England announced earlier this year that they expect the Base Rate to increase by 2nd Quarter 2015. Due to the positive correlation between interest rates and foreign exchange rates, this led to the pound strengthening against major FX currencies and emerging market currencies. In fact $11bn was removed from emerging market funds by the end of February primarily down to the positive outlook investors had on developed markets (source:Bloomberg)

The economic recovery has also played a part in strengthening the pound. UK unemployment fell by 63,000 to 2.33 million in the three months to January 2014, according to the Office of National Statistics. Lower unemployment will inevitably lead to an increase in a country’s GDP which symbolises growth and is one of the many signs of recovery. The budget especially the reforms relating to ISA’s and pensions were seen by the public as great news (more details check here)

The strengthening of the pound great news for people like me who want to get as many dollars as possible to use to spray at Nigerian weddings this summer but is bad for British investors in UK blue chip companies, as many of these firms report their profits and deliver dividend payouts in dollars. Capita Asset Services released a report recently arguing that the pound’s strength will wipe £3.5bn off the value of dollar denominated dividends of UK based firms.

With the weaker than expected US first quarter GDP growth (0.1% Actual v 1.1% Expected) and the manufacturing sector purchasing managers’ index reaching five-year highs this week,this will provide the impetus for investors to capitalise and invest in the Pound, before it’s too late and there is a ‘correction’ in the market.

GBPUSD is currently trading around 1.68-1.69 (i.e. 1 Pound = 1.6878 Dollars) – which is a 5 year high for the currency pair. Who knows the days where you’d get a 2 dollars for every pound may soon be back on the horizon – only time will tell….
@capitalmoments