The Olympics and Investing

The 2024 Summer Olympics are upon us. Thousands of athletes will gather in Paris over the next two weeks to participate in over 30 different sports, aiming to bring people together, encourage friendly competition and promote peace amongst different nations. You may be wondering what relevance this has with investments but there are several similarities that we can draw between the Olympic games and investing. Preparation, strategy, and mindset are required for both successful athletic performance and effective investment management. We explore these parallels in more detail below:
 
•    Planning, preparation and setting goals
Olympics: Athletes train for years to compete at the highest level, setting specific, measurable goals to track their progress and stay motivated.
Investments: Building wealth takes time and patience. Successful investing often involves setting clear financial goals, such as retirement savings or buying a home. Avoid short-term speculation and stay committed to your financial goals.
 
•    Diversification
Olympics: Athletes compete in multiple events within their sports to maximise their chances of winning medals – e.g. swimming can be a singles race, team race, different strokes etc, or athletes can participate in various gymnastics competitions.
Investments: Diversifying your portfolio across different asset classes (e.g. stocks and bonds) and geographies can reduce risk and improve the potential for returns. Just as relying on one sport is risky for a country, investing in a single asset can be risky for an investor.
 
•    Adapting to change and staying focussed
Olympics: Athletes must adapt to new competitors, changing rules, and evolving techniques whilst staying disciplined and focused on their goals despite the surrounding distractions and pressures.
Investments: Financial markets are dynamic, and investors must adapt to economic changes and market trends whilst maintaining focus on their long-term objectives. Despite market volatility and external noise, investors should maintain a disciplined approach during market fluctuations. Avoiding emotional reactions to short-term market movements is crucial as well as having the flexibility to adjust your strategy when necessary.
 
•    Risk Management
Olympics: Athletes take calculated risks to perform at their best while avoiding unnecessary dangers that could lead to injury.
Investments: Managing risk is paramount. Understand your risk tolerance and make informed decisions to protect your investments. Diversification, asset allocation, and regular portfolio reviews can help manage risk.
 
•    Professional guidance
Olympics: Athletes often have expert coaches, trainers, and support teams to guide their training and performance.
Investments: Seeking advice from financial advisors and investment specialists, or educating yourself through reliable sources can enhance your investment strategy and decision-making process.
 
•    Learning from Mistakes
Olympics: Athletes are critical of their own performances in order to learn from mistakes and continually improve.
Investments: Review your investment decisions, learn from past mistakes, and adjust your strategy accordingly. Continuous learning and improvement are essential for long-term financial success.
 
By learning and implementing these lessons from the Olympics, investors can move closer to achieving their financial goals and can make more informed investment decisions. Whichever investment strategy investors choose, it is important to align it with one's financial goals, knowledge, and risk appetite.
 
The table below highlights the predicted economic impact of the Olympic and Paralympic games on the host nation’s economies over the next few years.

The Noise

• The US Federal Reserve left its policy rate in the 5.25% - 5.50% range at their latest meeting this week, meaning rates have been unchanged for a year now. Crucially, Federal Reserve Chair Jerome Powell said on Wednesday interest rates could be cut as soon as September should the US economy follow its expected path. His statement softened the description of inflation and said the risks to employment were now on par with those of rising prices, language that opens the door for rates to fall in the near future. Looking at how markets reacted: Interest rate futures, stocks, and Treasury bonds all rallied strongly on Powell’s remarks

• The Bank of Japan raised interest rates to levels not seen since 2008, with the move from 0% - 0.1% to 0.25% coming just months after the BOJ ended eight years of negative interest rates. Bank Governor Ueda is seeking to dismantle his predecessor’s unorthodox approach, though Japan’s shift to tighter monetary policy contrasts with the move to lower interest rates seen in other major economies. The BOJ also revealed detailed plans to slow its extensive bond buying regime. After years of aggressively buying Japanese government bonds to reflate growth, the BOJ now owns roughly half of government bonds sold in the market. The central bank will need to tread carefully in tapering bond buying to avoid upending markets accustomed to its huge presence.

• The UK is set to take a significant step towards sustainable air travel by introducing a mandate for sustainable aviation fuel (SAF). From 1st January 2025, 2% of all UK jet fuel will have to be SAF, with targets set to increase to 10% by 2030 and 22% by 2040. Part of the bill introduces a revenue certainty mechanism for SAF producers, reducing investment risks and giving them the confidence needed to invest in new plants across the UK. This is a key part of the mandate, as earlier this week Air New Zealand was forced to ditch its 2030 emissions target as there simply isn’t enough SAF to go around. Thus far, widespread production of SAF has been slowed by high costs and limited government support.

The Numbers

The Nuance

It had been described as a coin toss in the lead-up to the Bank of England’s August Monetary Policy Committee meeting, and that’s exactly what we saw. The Committee voted 5-4 in favour of reducing interest rates from 5.25% to 5.0% in what was a “finely balanced” decision for some of the policymakers supporting the cut per the meeting minutes. The tone of the minutes of the meeting suggests the BoE is in no rush to reduce rates again. Further caution was echoed by Chancellor Rachel Reeves who welcomed the cut but emphasised that difficult decisions will still be necessary, which may take the form of tax rises in her October budget. 

It was the central bank’s first cut since the start of the COVID-19 pandemic in March 2020, and this week’s decision is a major turning point for the BoE and will give homeowners and businesses some relief. Borrowing costs in the UK have been held at 16-year highs for the past 12 months, weighing on an economy struggling to emerge from a shallow recession.  

Validating the impression left by the minutes, Governor Andrew Bailey said the BoE’s MPC would move cautiously going forward. He added that they “need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much”. Sterling slipped to its lowest against the US dollar since early July, with bond yields also falling slightly following the meeting. Markets now see the chance of a second successive rate cute at roughly 55% when the MPC meet in September. So, the Bank of England have joined the rate cut club, following the Eurozone, Switzerland, and Canada amongst developed economies to cut rates this year.