No­mura picks France

Financial Chronicle - - FRONT PAGE -

THE 21st FIFA World Cup be­gins on Thurs­day, to­day. Ahead of the first whis­tle, No­mura has de­vised a No­mura World Cup ‘port­fo­lio’ fea­tur­ing teams that it thinks will ‘per­form’ dur­ing the tour­na­ment. In­stead of fo­cus­ing on quan­ti­ta­tive mod­els based on rank­ings it has used a more qual­i­ta­tive bot­tom-up ap­proach tak­ing into ac­count the mo­men­tum be­hind the teams as well as thor­oughly analysing each team’s squads. The port­fo­lio in­cludes ‘safe havens’ – France, Spain and Brazil – which it ex­pects will reach the semi-fi­nals, ‘ low-be­tas’ – Poland, Uruguay and Denmark – which it be­lieves have the great­est po­ten­tial to be­come the ‘dark horse’ in the tour­na­ment, and ‘high-be­tas’ – Peru, Sene­gal – which No­mura thinks have a lim­ited chance of get­ting through the group stage but it would not rule out a sur­prise.

For the World Cup’s win­ner, the spe­cial re­port by No­mura fore­casts France, though it also thinks Spain, Brazil and Ger­many have a good chance of rais­ing the Cup at Luzh­niki sta­dium in Moscow on July 15.

The first whis­tle of the 21st FIFA World Cup will mark the start of a month-long ex­cite­ment for foot­ball fans around the globe. As the be­gin­ning of the World Cup is loom­ing, who will per­form well at the tour­na­ment is be­com­ing the lead­ing ques­tion for all foot­ball sup­port­ers.

Most ex­pec­ta­tions for the tour­na­ment re­sults are based on FIFA rank­ings or Elo rat­ings which re­flect the teams’ re­sults over the past few years. How­ever, such an ap­proach may not tell the whole story. At the end of the day, it is the 22 men on the pitch chas­ing the ball for 90 min­utes that de­cide the teams’ per­for­mance.

In the fi­nan­cial in­dus­try, the phrase ‘past per­for­mance is not in­dica­tive of fu­ture re­sults’ is a mantra and foot­ball does not dif­fer much in this re­gard. Who would have ex­pected that dur­ing the World Cup in Brazil four years ago, Costa Rica would win the group ahead of Uruguay, Italy and Eng­land?

In much the same way as build­ing an in­vest­ment port­fo­lio, the spe­cial re­port says the ef­fort is to build a well-di­ver­si­fied World Cup port­fo­lio with lim­ited risk that will per­form well at all times. “Not only have we looked for un­der­dogs that may sur­prise (rel­a­tive to what the rank­ings sug­gest) but also fo­cused on some safe-haven op­tions that we think have the great­est chances of win­ning the tour­na­ment. To do the cherry-pick­ing for our port­fo­lio we have also di­gested the tour­na­ment bracket to avoid get­ting stopped out at the very be­gin­ning of the games,” says the re­port.

The ba­sic idea be­hind the ex­er­cise was to look at teams in the same way as it would look at as­sets. Hence, apart from analysing re­cent re­sults it has taken into ac­count the mo­men­tum be­hind the teams (the change in the rank­ings since the pre­vi­ous World Cup has been con­sid­ered for this) and each team’s value dis­tri­bu­tion. As­set per­for­mance is usu­ally judged by rates of re­turn; since teams are be­ing con­sid­ered as as­sets, in­stead of rates-of re­turn, the value of all the play­ers in a team was checked and their dis­tri­bu­tion looked at with an im­plicit as­sump­tion that the team could play as well as the best player or as badly as the worst.

What the rank­ings re­veal

Both of the most im­por­tant rank­ings of na­tional foot­ball teams (FIFA rank­ing and Elo rat­ing) put Ger­many and Brazil as the favourites in the up­com­ing World Cup, fol­lowed by Bel­gium and Por­tu­gal (FIFA) or Spain and France (Elo). These in­di­ca­tions are broadly in line with book­mak­ers’ odds which as­sign the high­est prob­a­bil­ity to Brazil win­ning the Cup (22.2 per cent), fol­lowed by Ger­many (20 per cent), Spain (16.4 per cent) and France (15.4 per cent).

Fur­ther out, the teams’ rank­ings broadly match, but in a few cases the dif­fer­ences are quite vis­i­ble. For in­stance, ac­cord­ing to in­di­ca­tions im­plied by its FIFA rank­ing, Eng­land should make it to the Last 16 but ac­cord­ing to the Elo rat­ing the team should reach the quar­ter-fi­nals.

Mean­while, No­mura’s ex­pected top dark horse – Poland – ac­cord­ing to its FIFA rank­ing should end the World Cup just shy of the quar­ter-fi­nals (9th out of the 32 teams par­tic­i­pat­ing) while the Elo rat­ing sees Poland barely mak­ing it to the Last 16. Denmark is ranked 11th (FIFA) and 15th (Elo) among the teams play­ing in Rus­sia while Uruguay is ranked 16th and 11th re­spec­tively. In the ’high be­tas’ Peru is ranked 10th among the par­tic­i­pat­ing teams ac­cord­ing to both FIFA and Elo. In con­trast, Sene­gal is ranked 21st (FIFA) and 22nd (Elo), re­spec­tively.

At the op­po­site end, Saudi Ara­bia is seen as the weak­est team in the tour­na­ment, but in­ter­est­ingly the host Rus­sia does not per­form well in the rank­ings ei­ther. While this likely largely re­flects the fact that, as the or­gan­is­ing coun­try, Rus­sia has not played in the qual­i­fiers, there is lit­tle like­li­hood of the team sur­pris­ing to the up­side in the tour­na­ment.

Still, the book­mak­ers are likely tak- ing into ac­count the ‘home bias’ as they put Rus­sia 12th in their po­ten­tial win­ner rank­ings, giv­ing the host a non­neg­li­gi­ble 1.5 per cent chance of rais­ing the tro­phy at Luzh­niki sta­dium in Moscow on July 15. Since low-ranked Egypt is also in group A with Rus­sia and Saudi Ara­bia, the low-beta Uruguay could have an easy path through the group stage.

Search­ing for ‘dark horses’

The FIFA rank­ing is the most of­ten used indi­ca­tor to judge how a team will per­form in the World Cup. How­ever, by its con­struc­tion the rank­ing may un­der­es­ti­mate the po­ten­tial of some of the teams and hence does not rightly cap­ture the ‘dark-horses’. In the last World Cup held in Brazil in 2014, not all the coun­tries that qual­i­fied for the knock­out stage were among the top 16 coun­tries in the com­pe­ti­tion. There were four ex­cep- tions (Mex­ico, Nige­ria, Al­ge­ria, and Costa Rica). By fo­cus­ing solely on the FIFA rank­ing, it is pos­si­ble that some un­der­dogs will be over­looked.

Firstly, the rank­ing com­prises re­sults from the last four years which may be too long a pe­riod for some teams to be placed at the top of the rank­ing. In ad­di­tion, the rank­ing is based on four fac­tors: match re­sult; match sta­tus; op­po­si­tion strength, and re­gional strength. Since points earned at the World Cup or con­ti­nen­tal cham­pi­onships are val­ued most, any team miss­ing one of the ‘big’ tour­na­ments is au­to­mat­i­cally pe­nalised. Also weaker teams which do not play against top teams very of­ten do not get many points for their op­po­nents’ strength. Lastly, the re­gional strength used to com­pile the rank­ing is high­est for teams in Europe and South Amer­ica, so teams that do not meet teams from these re­gions of­ten are dis­ad­van­taged.

Player value

There are two ob­vi­ous short­com­ings of us­ing the mar­ket val­ues as a proxy for how much the play­ers are worth. First, older play­ers may be val­ued less than younger ones even if their skills are higher – just like as­sets which may have strong fun­da­men­tals but if they are close to ma­tur­ing they will not of­fer sig­nif­i­cant rates of re­turn. And sec­ond, clubs in some leagues may have higher bud­gets at their dis­posal which al­lows them to of­fer higher trans­fer val­ues than less wealthy teams.

In the team value dis­tri­bu­tions, the same char­ac­ter­is­tics were sought out as in as­sets’ rates of re­turns: high av­er­age/to­tal value, high up­side po­ten­tial (max value), low volatil­ity, low kur­to­sis (no fat-tails), and pos­i­tive skew­ness (greater po­ten­tial for up­side rather than down­side sur­prises).

France's for­ward An­toine Griez­mann (L) kicks the ball eyed by mid­field­ers Blaise Ma­tu­idi and Paul Pogba (R) dur­ing a train­ing ses­sion at the Gle­bovets sta­dium in Is­tra

Spain’s Isco Alar­con

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