UK stocks set for Olympic boost

Equity investors wishing to cash in on the London Olympics can take their pick from UK hotels, advertisers or retailers - history suggests that despite little macroeconomic benefit from the games, the FTSE 100 could shine in the following 12 months.

The past five summer Games saw the host nations' stock markets outperform the MSCI global benchmark by an average of 16.4 percent over the year following the event, research from Saxo Bank shows.

“The local index tends to outperform the other indices ... just basically from the publicity the country receives,” Mathieu Bolduc, equity analyst at Saxo Bank and author of the report, said.

“From a historical perspective the odds (for UK top stocks outperformance) are very good.”

While any aggravation of the euro zone crisis poses a risk to the FTSE index of top stocks' prospects, the benchmark is supported by attractive valuations and remains a popular bet for investors keen to avoid direct exposure to mainland Europe.

The FTSE 100 is trading at a 12-month forward price to earnings ratio of around 9 times - cheap compared with its long-term median of around 12.8 times and to the US S&P 500 index on 11.8 times, according to Thomson Reuters Datastream.

Societe Generale, which increased the allocation of UK equities to the maximum 10 percent in its multi-asset portfolio this week, listed the Olympics as an additional reason for liking the FTSE over the S&P - a trade it says is supported by valuations and politics.

DRINKING IN THE SHOW

A more direct way to play the Games could be through buying individual stocks. Some analysts have recommended Aggreko , the world's biggest temporary power provider. It has secured a contract valued at about 50 million pounds ($80 million) for the games, which kick off on July 27.

Intercontinental Hotels Group, which will run the 15,000 strong athletes village as well as lodging visitors in its London outposts, is also set to cash in, while increased advertising spend should boost WPP.

Many UK retailers are counting on the Olympics to fuel spending - be it on the extra food and drink consumed while watching, new televisions on which to watch at home, official merchandise to mark the event or even sports equipment for those inspired by the proceedings.

“We think M&S (British brand, good range across food and clothing), Next (makers of the Olympic uniforms with a good range of London 2012 merchandise) and Sainsbury's (a sponsor of the Paralympics) should benefit particularly,” strategists at Esprito Santo said in a note.

Market researcher Kantar expects grocery sales to “soar” during the Olympics, nothing the strong performance in the run-up to Queen Elizabeth Diamond Jubilee celebrations when Britons splashed out an extra 213 million pounds.

For others, though, the scale of any benefit is hazy. Department store chain Debenhams, for example, said the impact of the summer games was still “uncertain”.

“Spending on sports-related items might benefit from a short-lived uptick in participation among the general public, with a boost to pain relief medication shortly after. Food, drink and televisions could also benefit as the nation settles down to watch sports,” analysts at RBS said in a note.

“But equally we can't be on the High Street and on the sofa at the same time and reduced footfall could actually offset any direct boost from the Olympics.”

Overall, the UK gross domestic product could get a boost of around 0.1 percent thanks to the games, according to Capital Economics - not to be sniffed at in the current climate, but not enough to drag the country out of recession.

“There could be some confidence effect on the economy that boosts consumer spending a bit and provides support to some firms' equity prices,” said Samuel Tombs, UK economist at Capital Economics.

“A lot will depend on the impact on consumer confidence, whether domestic consumers really go out and spend a bit.” - Reuters