World Cup winners: 10 shares investors might pick for their team

Stock screen expert Ben Hobson investigates the link between football success and stock market performance. He also finds high-quality momentum shares to follow.

With the FIFA World Cup now under way, the next few weeks promise all the agony and ecstasy that comes from following football.

For many investors, action on the pitches of Qatar will be a welcome distraction after a tough year in the stock market. But even in football there are tactical takeaways that could help you invest better.

• Discover: How to buy Shares | Free regular investing | Super 60 Investment Ideas

We’ve all heard enthusiastic coaches insist that with a solid defence, a spark of quality and some much-needed momentum, even out-of-form players can turn into match-winners. The same goes for shares…

Against the run of play

Legendary England manager Bobby Robson once said that “the first 90 minutes of the match are the most important.” For investors, the long game in markets stretches into years, if not decades. But after a long spell of rising inflation and looming economic turmoil, this year has felt harder than most. 

So can the World Cup itself be a fillip for beaten-up shares?

Well, we know that there are perhaps hundreds of seasonal effects that are credited for shifting prices in the stock market. This year’s hoped-for Santa Rally (perhaps the most famous of those seasonal trends) looks set to coincide with the World Cup Final. So would a win the week before Christmas deliver a big present to investors?

Research into the impact of the World Cup on share price performance does show evidence of a connection.

A 2007 study entitled Sports Sentiment and Stock Returns, found that losing in the group stages of a tournament triggered an average abnormal 0.47% fall in the country’s stock market the next day.

• Insider: chiefs load up on shares tipped to double
• Stockwatch: a quality small-cap share to buy after chart breakout?

The declines were keenly felt in countries where football is taken very seriously, especially in Western Europe. The market losses got bigger in the knockout phases of tournaments.

Overall, the study concluded that lost games cause investors to feel miserable, and that is what weighs on share prices.

In terms of feel-good factors then, the pain of a loss is much more influential than the joy of a win when it comes to World Cup football and its impact on shares.

This very much reflects what psychologists already know about the tendency for investors to be instinctively loss averse. Day-to-day, it is a flaw that can lead to clinging on to losing positions in the hope of them recovering, while selling winning positions to capture short term profits.

Defensive tactics in tough markets

Market conditions this year have been bearish, particularly in the UK’s mid- and small-cap indices. Pressure on prices has forced a rethink of the investment strategies that have worked well in recent years.

Today there is more focus on shares in sectors that are not completely at the mercy of the economy. At the very defensive end of the market, there are sectors like utilities, healthcare and consumer staples such as tobacco, beverages and food production.

• 14 UK shares to own in 2023
• 10 FTSE 250 shares that could rebound quickly

Others like technology, telecoms, energy and industrials have sensitivity to the economy, but they can be defensive too.

By contrast, cyclical sectors including consumer discretionary, finance and basic materials are much more out of favour when there is a recession on the horizon.

A quality track record

When it comes to financial quality, profit has been a crucial factor this year. Rising inflation and the prospect of economic contraction can hurt businesses. So strong margins and high efficiency have become very desirable.

Firms with a track record of churning out high returns from the assets and capital at their disposal is important.

I’ve looked at some of these profitability measures over the past few weeks, including Return on Capital Employed, Return on Assets and Return on Equity. These terms can seem abstract, but they are all different ways of understanding how efficient a company is at generating a profit.

Ideally, you want to see consistently high returns over time, and preferably above average for the sector.

Momentum…never to be underestimated

With indices under pressure all year, price momentum has ground to a halt in 2022. But while it might have underperformed as a strategy, momentum is still a useful way to find shares that are resisting or even breaking out of the market trend - which some shares are doing.

Momentum research has shown that buying stocks with strong six-month price momentum can deliver near-term outperformance. And while momentum is known to be volatile in bearish conditions, it makes sense to look at which shares are finding favour in the market.

Taking these rules together, here is a look at some of the results of this defensive quality momentum screen:

The results are restricted to ‘defensive’ and ‘sensitive’ industries, but you can see that a focus on consistently high-quality and recent momentum picks up shares mainly in technology and industrial sectors.

ROCE figures are not always comparable across shares in different sectors, but they are all achieving double-digit five-year returns, which is promising. All are forecast to see positive sales and earnings per share increases in the year ahead.

In terms of valuation, the price/earnings (PE) ratios vary widely, but there are a number that are in the 20-30-plus range. On a rule-of-thumb basis, that would likely look expensive for most value investors, but it’s fairly typical of higher quality firms.

• The 50% Club: bombed-out cyclical stocks to own when the market turns

Overall, they have all outperformed the FTSE All-Share over the past six months, which suggests strong potential momentum. Kainos Group (LSE:KNOS) leads the list in terms of price strength, but there are several big-hitting performers from recent years in here, including Cerillion (LSE:CER), Ashtead Group (LSE:AHT), Diploma (LSE:DPLM) and Spirax-Sarco Engineering (LSE:SPX).

They think it’s all over

There have been some surprisingly sharp upward moves in mid- and large-cap shares in some sectors in recent months. And while the threat of recession has created a lot of uncertainty, longer-term investors might feel that some of the market’s better-quality companies have the potential to rebound quickly from this year’s sell-off.

If you were picking your football-inspired first 11 from the market, trends this year suggest taking a defensive approach with a focus on quality and momentum wherever you can get it.

Ben Hobson is a freelance contributor and not a direct employee of interactive investor.