KPMG’s Ben Dunning explores the trends of the past decade in football and investment markets, with an outlook to the future.
Let me take you back to 1992 - when I was just a twinkle in my mother’s eye – when £5.5m would buy you Paul Gascoigne; a 10 year Government Bond earned a c.9% yield; and the Price Earnings (PE) Ratio for equity markets hovered at around 24. Fast forward to today and £5.5m wouldn’t get you much more than a Sunday league striker, you’d be pleased with a 1.5% yield and the PE ratio is bouncing around at 32ish. So what is the common denominator between football transfers and investment markets?
Money, and lots of it. Football (and the Premier League in particular) has seen an influx of cash from broadcasting rights and overseas billionaires, driving the cost of the average player in the Premier League from c.£800k in 1992 to c.£15m in 2017. With no central body, such as a central bank, able to control this inflation, and with the same pool of players available, rising transfer fees were an inevitable by-product of broadcasting revenue per season increasing by c.45x in the 15 years since 1992.
Where perhaps previously there were ‘bargains’ to be found on your own front door (Eric Cantona for example), football clubs have sought riskier deals from less well known leagues and clubs. Take Richarlison, 20 years old, picked up by Watford for £11.2m (two Paul Gascoignes in 1992) after 66 appearances and 18 goals in the Brazilian leagues and within a year, moving on to a Premier League rival for £40m. These examples of true value are few and far between and represent a problem football managers and fund managers alike have increasingly faced in rising markets.
Since 2008, central banks around the world have slashed interest rates and embarked on varying levels of quantitative easing in a bid to restore confidence and risk taking, and to reduce the cost of borrowing. The impact of this has been a seemingly endless bull run in equities and other asset classes, leaving valuations increasingly stretched and value increasingly harder to find.
With seemingly no losers (except commodities), it has been a systematic flooding of capital into financial markets – which, less a few bouts of short term market noise, has had markets dancing on the ceiling. The PE ratio (noting it has its critics) indicates steep valuations, whilst the 10 year yield has provided little in the way of competition for capital, leading to fund managers seeking ‘Richarlison’ type value across both equity and credit markets. The risks inherent are not, however, lesser known leagues, youthfulness and inexperience, but higher leverage, weaker covenants, ‘toppy’ valuations and companies who have prospered under unprecedented expansionary policies.
In football we have reached a point where financial fair play is curbing the ambitions of upcoming spenders and political pressures are deterring the mega-rich from dabbling as much as they once did. Financial markets, on the other hand, are coming to terms with the Federal Reserve leading the way in monetary tightening and central banks across the globe putting away their QE cheque books. Where once these two markets shared cash in abundance, they now find themselves in strikingly similar positions where it has begun to dry up.
So what happens when the music stops, the lights come on, Robbie Williams has been played and there is no encore? We’ve all been there, we all know it isn’t pretty and as Warren Buffet once said, “you only know who’s swimming naked when the tide goes out”. It is true, a manager in any field is only as strong as his strategy and no amount of cash guarantees success. So, what is more important is having the right investment strategy in place and then pick the right manager with robust investment philosophies and processes, and strong track records across markets and cycles to implement this strategy. It is only then you can be safer in the knowledge that as the cash induced tide recedes, you will still be wearing your swimwear.