What could Cristiano Ronaldo have to teach us about QE?
As the Premier League kicks off for another season, we return to the subject of football transfer fees and the important lesson it holds for investors who have benefitted from rising asset prices since the financial crisis
England and India may be barely a match and a bit into the principal Test series of the summer and yet, as has become traditional at this time of year, the back-page headlines have for weeks now been less focused on cricket than the wheeling and dealing, the pound signs and telephone number fees associated with the football transfer window, which closed for the Premier league at 5pm last night.
True to form, the top English clubs have not been shy about splashing the cash, with Manchester City buying Leicester star Riyad Mahrez for £60m and the world record transfer fee for a goalkeeper being broken twice in the space of a month – the £71m Chelsea have just paid Athletic Bilbao for Kepa Arrizabalaga eclipsing the £66.8m Liverpool shelled out for Roma’s Alisson in July.
Indeed, the very largest numbers of the summer have tended to relate to continental clubs – not least the €145m (£131m) Paris Saint-Germain (PSG) paid Monaco to finalise the transfer of France’s teenage World Cup sensation Killian Mbappe.
That is the second highest transfer fee of all time, beaten only by the €222m PSG paid Barcelona for Neymar last year.
Eye-watering release clauses
Then there was Cristiano Ronaldo’s €100m transfer from Real Madrid to Juventus, to which we will return in a moment, and – arguably most eye-catching of all – the more theoretical €750m ‘release clause’ that Real Madrid have assured all potential suitors for Luka Modric they will have to meet if they want to secure the services of the Croatia playmaker.
We shall see.
After all, for some years, Ronaldo’s Real Madrid contract contained a €1bn release clause – though press reports have suggested that was negotiated down earlier this year, first to €400m and then to the €120m that appears to have enabled his move to Juventus.
His eventual €100m price-tag, incidentally, represented a €6m profit on the then world-record €94m Real paid Manchester United for Ronaldo in 2009.
And here we come to the value angle on this summer’s dealings – where the largest numbers being bandied about were all theoretical ‘buy-out’ triggers and one of the world’s very best players moved on for a relatively small mark-up.
Yes, of course Ronaldo is nine years older than when he left Manchester United but, if any 33-year-old has a few more seasons left in him, you would have to think it would be the evergreen Portugal captain.
Transfer fees continue to spiral upwards
Anyway, since when did realism impinge on the upper reaches of the transfer market?
As we have discussed before in What Alan Shearer has to teach us about inflation, transfer fees have been spiralling upwards for more than 20 years.
So, while it is way too early to suggest the football market may be pausing for breath, now does seem an opportune moment to revisit a parallel we have previously drawn with quantitative easing.
Quantitative easing - ramping up price inflation
Known as ‘QE’ for short, this is the shorthand term for the various measures taken by the Bank of England, the US Federal Reserve and other central banks around the world in the wake of the global financial crisis of 2008/09.
In essence, it involves buying up government bonds and other securities with the aim of lowering interest rates, making asset markets more liquid and encouraging financial institutions to lend money.
As we have discussed before, both the football transfer and investment markets are relatively ‘closed’ systems that have seen rampant price inflation after receiving huge sums of money – respectively, from TV rights and QE.
Thus, for example, in football top English clubs apparently now view £65m-odd as the going rate for goalkeepers while in investment we have bonds offering negative yields and expensive ‘bond proxy’ equities.
Even though other factors in the system may remain constant – a Premier League club can, for example, never field more than 11 players on the pitch at any one time – an enormous influx of money can have a distortive effect.
With the Premier League able to command ever greater prices for its TV rights, therefore, it should come as no surprise that transfer records keep being broken.
Supply and demand
Similarly, there has been no increase in the number of, for example, government bonds being issued and so, with central banks buying them up as part of their QE programmes, it should also come as no surprise that yields are at record lows.
That is what happens to bonds when their prices rise – and it is a basic law of economics that, when demand outstrips supply, prices rise.
Investors should note, however, there was a period when TV rights actually fell – the 2004/07 contract versus 2001/03 – and, within that timeframe, the £30m Manchester United paid Leeds for Rio Ferdinand was not surpassed.
If you are fortunate enough to hold assets that have benefitted from an enormous influx of money, then, you do need to keep in mind that money could one day start flowing in the opposite direction.
Sooner or later, we are going to reach a time when central bankers stop throwing money at markets and, when that happens, it is unlikely hopes and dreams will continue to be priced at a premium (regardless of whether or not they might actually come true).
Valuation, in other words, will once more become an important factor and, while not all investors may welcome that moment, here on The Value Perspective, we certainly will.
Fund Manager, Equity Value
I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst.
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