The 21st FIFA World Cup begins on Thursday, today. Ahead of the first whistle, Nomura has devised a Nomura World Cup ‘portfolio’ featuring teams that it thinks will ‘perform’ during the tournament. Instead of focusing on quantitative models based on rankings it has used a more qualitative bottom-up approach taking into account the momentum behind the teams as well as thoroughly analysing each team’s squads. The portfolio includes ‘safe havens’ – France, Spain and Brazil – which it expects will reach the semi-finals, ‘low-betas’ – Poland, Uruguay and Denmark – which it believes have the greatest potential to become the ‘dark horse’ in the tournament, and ‘high-betas’ – Peru, Senegal – which Nomura thinks have a limited chance of getting through the group stage but it would not rule out a surprise.

For the World Cup’s winner, the special report by Nomura forecasts France, though it also thinks Spain, Brazil and Germany have a good chance of raising the Cup at Luzhniki stadium in Moscow on July 15.

The first whistle of the 21st FIFA World Cup will mark the start of a month-long excitement for football fans around the globe. As the beginning of the World Cup is looming, who will perform well at the tournament is becoming the leading question for all football supporters.

Most expectations for the tournament results are based on FIFA rankings or Elo ratings which reflect the teams’ results over the past few years. However, such an approach may not tell the whole story. At the end of the day, it is the 22 men on the pitch chasing the ball for 90 minutes that decide the teams’ performance.

In the financial industry, the phrase ‘past performance is not indicative of future results’ is a mantra and football does not differ much in this regard. Who would have expected that during the World Cup in Brazil four years ago, Costa Rica would win the group ahead of Uruguay, Italy and England?

In much the same way as building an investment portfolio, the special report says the effort is to build a well-diversified World Cup portfolio with limited risk that will perform well at all times.

“Not only have we looked for underdogs that may surprise (relative to what the rankings suggest) but also focused on some safe-haven options that we think have the greatest chances of winning the tournament. To do the cherry-picking for our portfolio we have also digested the tournament bracket to avoid getting stopped out at the very beginning of the games,” says the report.

The basic idea behind the exercise was to look at teams in the same way as it would look at assets. Hence, apart from analysing recent results it has taken into account the momentum behind the teams (the change in the rankings since the previous World Cup has been considered for this) and each team’s value distribution. Asset performance is usually judged by rates of return; since teams are being considered as assets, instead of rates-of return, the value of all the players in a team was checked and their distribution looked at with an implicit assumption that the team could play as well as the best player or as badly as the worst.

What the rankings reveal

Both of the most important rankings of national football teams (FIFA ranking and Elo rating) put Germany and Brazil as the favourites in the upcoming World Cup, followed by Belgium and Portugal (FIFA) or Spain and France (Elo). These indications are broadly in line with bookmakers’ odds which assign the highest probability to Brazil winning the Cup (22.2 per cent), followed by Germany (20 per cent), Spain (16.4 per cent) and France (15.4 per cent).

Further out, the teams’ rankings broadly match, but in a few cases the differences are quite visible. For instance, according to indications implied by its FIFA ranking, England should make it to the Last 16 but according to the Elo rating the team should reach the quarter-finals.

Meanwhile, Nomura’s expected top dark horse – Poland – according to its FIFA ranking should end the World Cup just shy of the quarter-finals (9th out of the 32 teams participating) while the Elo rating sees Poland barely making it to the Last 16. Denmark is ranked 11th (FIFA) and 15th (Elo) among the teams playing in Russia while Uruguay is ranked 16th and 11th respectively. In the ’high betas’ Peru is ranked 10th among the participating teams according to both FIFA and Elo. In contrast, Senegal is ranked 21st (FIFA) and 22nd (Elo), respectively.

At the opposite end, Saudi Arabia is seen as the weakest team in the tournament, but interestingly the host Russia does not perform well in the rankings either. While this likely largely reflects the fact that, as the organising country, Russia has not played in the qualifiers, there is little likelihood of the team surprising to the upside in the tournament.

Still, the bookmakers are likely taking into account the ‘home bias’ as they put Russia 12th in their potential winner rankings, giving the host a non-negligible 1.5 per cent chance of raising the trophy at Luzhniki stadium in Moscow on July 15. Since low-ranked Egypt is also in group A with Russia and Saudi Arabia, the low-beta Uruguay could have an easy path through the group stage.

Searching for ‘dark horses’

The FIFA ranking is the most often used indicator to judge how a team will perform in the World Cup. However, by its construction the ranking may underestimate the potential of some of the teams and hence does not rightly capture the ‘dark-horses’. In the last World Cup held in Brazil in 2014, not all the countries that qualified for the knockout stage were among the top 16 countries in the competition. There were four exceptions (Mexico, Nigeria, Algeria, and Costa Rica). By focusing solely on the FIFA ranking, it is possible that some underdogs will be overlooked.

Firstly, the ranking comprises results from the last four years which may be too long a period for some teams to be placed at the top of the ranking. In addition, the ranking is based on four factors: match result; match status; opposition strength, and regional strength. Since points earned at the World Cup or continental championships are valued most, any team missing one of the ‘big’ tournaments is automatically penalised. Also weaker teams which do not play against top teams very often do not get many points for their opponents’ strength. Lastly, the regional strength used to compile the ranking is highest for teams in Europe and South America, so teams that do not meet teams from these regions often are disadvantaged.

Player value

There are two obvious shortcomings of using the market values as a proxy for how much the players are worth. First, older players may be valued less than younger ones even if their skills are higher – just like assets which may have strong fundamentals but if they are close to maturing they will not offer significant rates of return. And second, clubs in some leagues may have higher budgets at their disposal which allows them to offer higher transfer values than less wealthy teams.

In the team value distributions, the same characteristics were sought out as in assets’ rates of returns: high average/total value, high upside potential (max value), low volatility, low kurtosis (no fat-tails), and positive skewness (greater potential for upside rather than downside surprises).

Source: Nomura