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Jan. 7, 2008, 4:25 a.m. EST

China stocks going for gold as Olympics loom

HSBC report finds pre-Games dip, but solid market prospects thereafter

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By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) -- Some unexpected winners and losers will likely emerge from the Beijing games this summer in a corporate sense, that is if the experience of previous nations that have hosted the Olympics is any indication.

Analysts see a year of selected stock picking ahead, with companies leveraged to Chinese domestic consumption themes, such as airlines, food and beverages makers, and hotels, expected to make it to the podium.

China will host the XXIX summer Olympics in Beijing from 8-24. By the time the games begin, China will have spent $40 billion on new venues and other infrastructure to support the thousands of athletes, coaches and dignitaries during the competition.

Investors banking on gold in China's Shanghai Composite Index or on the China Enterprises Index in Hong Kong should pay attention to historical trends.

It's difficult to tell whether the games bring good fortune, although the chances of a decent performance aren't bad if one sifts out the hype.

In nine of the 11 Olympiads going back to Tokyo in 1964, the stocks markets of the host nation fell 6% on average in the three months leading up to the games, according to a recent report by HSBC Global Research. Data from the Mexico Olympics in 1968 and the Moscow Games in 1980 were excluded from the survey because those countries had no officially functioning stock markets at the time.

Apart from that dip, returns weren't too bad.

In the year preceding that three-month blip, the stock markets of host nations rose 12% on average, outperforming global equity markets of the period by 5%.

Beyond the Olympic event, the returns are generally more positive. Markets rose 21% on average in the 12 months after the games, beating out a 9% rise in global equities.

"In almost every case, the strongest performance came in the first six or seven months after the games," wrote HSBC strategist Garry Evans in a research report.

The Greek stock market outpaced global equities by 20% in the year that began August 2004, when Athens hosted the games, Evans said. The Australian index sprinted 31% above other global markets in the period following 2000, when the summer games were held in Sydney.

There are two big exceptions to the bullish scenario, however.

Germany's stock market fell 20% in the year following the 1972 summer games in Munich, an event that was marred by the hostage taking and murder of Israeli athletes.

Tokyo's 1964 games also proved something of a disappointment for investors expecting an Olympic halo effect, with the Nikkei Stock Average dipping 7% the year following.

Watch out for that hangover effect

There's another myth to dispel: that the Chinese economy will keep rocketing ahead at its current breakneck pace. China's economy grew 11.5% in the first three quarters of 2007 from a year earlier, a pace most economists expect will hold for the full 12 months. This year, the economy is expected to slow somewhat, with Standard Chartered forecasting growth around 9.5%. Also see emerging markets page.

Most host nations experienced a hangover effect well in advance of the opening ceremonies, with economic growth having peaking on average two years ahead of the games proper, as construction spending winds down.

Among the 11 previous hosts, on average GDP growth was 1.6 percentage points higher than global growth in the two years before the games, 1.9 percentage points higher in the preceding year and 0.2 percentage points above in the year of the games.

In the year following the Olympics, growth generally fell 0.1 percentage point below the global average, according to HSBC data.

"The implications for China are that economic growth might slip in 2008 as the Olympic construction boom ends, but could then fall sharply in 2009," Evans said.

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