Investing in Japan – Thematic investments in light of the Pokémon Go craze

Unless you’ve been living under a rock during the past few weeks, you must have heard about the Pokémon Go phenomenon that has taken the world’s attention by storm.

The release of the smash-hit app by Niantic Inc. has not only resulted in global hype, but has also had significant repercussions on the stock market.

Shares of Nintendo, which has a small stake in Niantic and a 32% stake in The Pokémon Company (the company that owns the rights to the Pokémon franchise), have been on a rollercoaster ride and their average daily turnover on the Tokyo stock exchange has multiplied by a factor of 30 after the release of Pokémon Go.

The share price more than doubled during the first few days, then plummeted after the company had to play down the financial impact of the game’s success.

Other stocks have also been impacted by Pokémon fever: McDonald’s Japan, which distributes Pokémon characters with its Happy Meals, jumped by 25% after the game’s release.

First Baking, the baker of “Pokémon Bread”, saw its share price increase by 23% and Fuji Media Holdings, which owns a small stake in Niantic, was also up by more than 20%.

Sanoyas Holdings, an engineering company whose leisure arm runs Pokémon themed facilities, saw its share price temporarily skyrocket by more than 300%, while shares of Imagica Robot, a producer of Pokémon cartoons, briefly gained almost 200%.

While the jury is still out on the potential impact of the game’s success and the Pokémon craze on the financial results of these companies, it is clear that riding these kinds of waves on the stock market means taking big risks.

Getting the right timing for such investments (“bets” would probably be a more appropriate term) can turn out to be very frustrating, as short-term news flows result in big market swings.

Often investments made during these volatile times are merely speculation on short-term trading gains and are rarely made for the purpose of establishing long-term holdings.

As such, company valuations tend to be ignored and prices paid for the investments often prove to be too high over the long run.


Short-term investment themes on the Japanese stock market

Riding such thematic waves is a more common phenomenon on the Japanese stock market than other markets. After decades of disappointments, the mood of many investors has veered away from fundamental investing.

Even after the nice rally we’ve enjoyed in the past three years, most global investors are underweight on Japan and shy away from long-term commitments.

To gain exposure to the Japanese market, they tend to play certain themes for a while, without paying too much attention to company fundamentals or valuations. The recent Pokémon frenzy, although extreme, is just an example of many others in the past.

In 2003 for example, the SARS outbreak hit Asia and Japanese investors rushed to buy makers of masks and dumped travel-related stocks. In 2008, the spike in crude oil prices prompted investors to buy companies that were somehow connected to the theme of alternative energy.

In 2012, the spread of smartphones and the proliferation of social games led to a strong rise in the share prices of game-related companies.

In recent years, the rise in foreign tourists visiting Japan has increased demand for transportation and consumer stocks. Although some themes have influenced investor behaviour more than others, they have often resulted in big market swings and unfulfilled expectations.

At BLI – Banque de Luxembourg Investments, we are not trying to capture and ride these waves. Our investment approach leads us to buy companies which benefit from a competitive edge that allows them to create shareholder value over the long term.

We also put a big emphasis on company valuation in order to avoid falling into the trap of overpaying for our investments. We do not base our investment decisions on short-term themes and tend to avoid over-hyped stocks that are buoyed by growth expectations that are not sustainable.

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