The Bond Vigilantes World Cup Model – Knockouts

Following on from the original blog.

29 June

With the group stage complete, it is worthwhile taking stock of how the model has performed, and now we know the tournament bracket, how we expect things to play out from here.

• Outcome accuracy 48 / 72 (66.7%).
  
  
• Exact scorelines 8 / 72 (11.1%), which sits in the normal corridor for Poisson-style football forecasters (typically 8% to 14%).
  
  
• The model is good at picking clear winners: when it predicts a win, it is right about 69% of the time.
  
  
• The clear weak spot is draws. 20 matches finished level, the model only called 11, and only 6 of those came in.
  
  
• Goal volumes have so far been systematically under-predicted. Mean predicted total goals per match 2.47 versus actual 2.99, with 49% of matches under-predicted on total goals and only 32% over-predicted. The correlation between predicted and actual total goals is weak at 0.21, so the model is not really pricing how open a game will be.
  
  
• But, goal difference is where the model earns its keep with a correlation of 0.67 with actual goal difference. It has predicted relative team strength reasonably well.
  
  

Does the model outperform a reasonable benchmark?

A simple approach is to take the FIFA-ranked favourite to win every match, and score it on the same outcome basis as the model. Over the 72 fixtures, that benchmark got 44 results right, or 61.1%. A slightly fairer version allows for draws: whenever the two sides are within eight FIFA places of each other, the benchmark calls a draw; otherwise the higher-ranked team wins. That also landed on 44 out of 72.

To check that approach isn’t bias in the model’s favour, we varied the draw threshold between three and twenty ranking places. The benchmark’s outcome accuracy moves around in a narrow band between roughly 57% and 63%, and never closes the gap to the model’s 66.7%.

That said, with a sample of 72 the confidence interval on outcome accuracy is still wide. So, whilst not being statistically watertight, it at least points in the right direction. It is however probably too early to say that economics can actually predict football outcomes.

We will continue taking you through the round of 32 knock-out stage with commentary on countries we have yet to cover (starting below), along with predictions for every game. Check back each day for the latest.

With Canada leaving it late against South Africa last night but ultimately going through (the model predicted 2-0), we proceed through the round of 32 with Brazil vs Japan, Germany vs Paraguay and Netherlands vs Morocco.

With commentary for Brazil, it’s Carlos Carranza, EMD Fund Manager:

Brazil: 5 world cups, 9% real rates. Brazil is the most successful team in the history of the world cup, which is a painful fact to acknowledge when this paragraph is written by an Argentinian. But our Southern Cone neighbours deserve full credit: they have won the world cups 5 times, which is the record. They have been the “only” team that has played every single world cup since 1930 (never failed to qualify), and they have reached 7 finals (winning 5 of them of course).

Yet, the most successful player in their team right now is Mr. Gabriel Galípolo, the Coach of the Central Bank. He certainly rivals Neymar’s talent, keeping real rates at a solid 9.5% (doubling the amount of world cups), which has helped keep the BRL well anchored, while offering strong carry opportunities as financial stability conditions remain well preserved. Fun fact: When the post-COVID inflation hit the global economy, Brazil had hiked almost 1,000bp before the Fed delivered their first hike. Which is indeed a signal of well managed policy making and “jogo bonito”.

Brazil faces 2 key challenges currently: First, while they have elite attackers such as Neymar, or Vinícius Jr., the team has heavy reliance on individual brilliance, and less of a fully cohesive system vs teams (like France). Second, their fiscal deficit is running at a 1% on a primary basis, and close to an 8% overall, which will require significant team-player efforts to reach medium-term debt sustainability.

With commentary for Germany, it’s Rob Burrows, Global Macro Fund Manager:

For decades, Germany has been Europe’s economic ballast: dependable, disciplined, and occasionally accused of making even prosperity seem slightly boring. Its public finances have long been the envy of developed nations, with debt levels that many of its neighbours can only dream of. Yet even Germany has not been immune to economic gravity. A slowing industrial sector, weak productivity growth and geopolitical headwinds have prompted Berlin to loosen the purse strings, with a significant increase in public spending expected over the coming years.

The obvious question for investors is whether fiscal stimulus can revive growth. The less obvious question is whether it can help Germany win the World Cup.

There is, admittedly, little academic literature linking defence expenditure, infrastructure investment and penalty shootout conversion rates but I have tried…

With an R^2 (coefficient of determination) of 0.1 and a negative correlation of 0.45, it’s pretty clear to all that any increased spending does not translate into positive outcomes. Nevertheless, confidence matters. If Germany can rediscover its economic swagger and rediscover the Jurgen Klinsman magic and ruthless efficiency that once made opponents fear every pass and corner kick, they may have a chance.

Sadly, Germany’s greatest predictive asset, boasting an enviable track record, Paul the Octopus, is no longer with us. His absence leaves a genuine analytical void and I am confident his predictions would have looked favourably on Germany and this current cohort of footballers. For what it’s worth, at the outset the less reliable bookies give the Germans a 16/1 chance of lifting silverware.

For now, investors and football fans alike will watch closely. Germany may be embarking on a fiscal expansion not seen in decades. Whether that translates into stronger GDP growth remains uncertain. Whether it translates into lifting the World Cup trophy is even more uncertain.

And again Rob Burrows, Global Macro Fund Manager, with commentary for the Netherlands:

The Netherlands arrive at another World Cup with the familiar label of football’s eternal bridesmaid. Three World Cup finals, three heartbreaks. Always the bridesmaid, never the bride.

The Netherlands is currently undertaking one of the biggest structural changes to its pension system in generations. Trillions of euros of pension assets are gradually moving from a defined-benefit style framework towards arrangements where outcomes are more directly linked to market performance. For bond investors, this isn’t merely an administrative exercise. Pension funds have long been among Europe’s most influential buyers of government bonds and interest-rate hedges. As portfolios adjust, the ripples are being felt across sovereign debt markets, yield curves and swap markets.

However, despite this structural change the Dutch football team’s presence at the world cup feels a lot more like the Netherland’s place in the Eurozone. Solid, reliable, balanced and unlikely to ruffle many feathers. Debt sits comfortably in the mid 40% of GDP range and have kept their heads down within a troubled currency bloc.

The team’s strong defensive capabilities anchored by Virgil van Dijk are as solid as the countries fiscal position but ultimately the team might lack what it takes to go all the way. That said, they are not to be written off as they will likely be in the conversation of the latter rounds.

I’m sure Dutch hopes are riding just as high as the atmosphere in an Amsterdam coffee shop.

Summary of all knock out game predictions