What Can Pokémon and Nintendo Teach Us About Expected Returns Over the Next Decade?

In the Financial Times today, Jan Hatzius, Chief Economist and Head of Global Investment Research at Goldman Sachs, wrote: "Federal Reserve data shows that the real value of the dollar still stands nearly two standard deviations above its average since the start of the floating exchange rate era in 1973. The only two historical periods with similar valuation levels were the mid 1980's and the early 2000s. Both set the stage for depreciation of 25-30 pct."

The White House is currently doing everything they can to weaken the dollar. The data suggests that once they get the ball rolling, a fair amount of inertia will kick in, and they have high odds of success. 

Consider that today it is estimated foreigners hold $22-trillion of US assets: cash, bonds, stocks, and real estate. For the past fifteen years as stocks and real estate increased in price dramatically AND the US dollar appreciated investors received incredible returns for preserving their Yen and Yuan safely in the United States of America. For example, if you were a citizen of the UK and bought the S&P 500, instead of earning 15% per year between 2009 and 2024 you earned 20%. That means you doubled your money every 3.5 years. It is not only American investors that own too much of the S&P 500. Foreigners do too. What happens when the trend reverses?

So far, the US dollar is only down -5% against a broad basket of currencies, as measured by the DXY Index. The dollar has a lot more adjusting to do. 

To make the analysis a little more concrete, consider the example of Nintendo. Coincidentally, today, Nintendo began taking pre-orders for the new Nintendo Switch. The last iteration, the greatest selling handheld video game console of all time, was released 7 years ago. My sons love it for the suite of Pokémon games. 

If you are an American holding Nintendo stock, through the ADR NTDOY, since January of 2021 you have earned a cumulative return of 27.4%. Not bad, but below the S&P 500’s 50.6%. However, before you conclude the subpar result was due to lackluster performance of the company, consider that the Yen depreciated by 37% against the US Dollar over the same time period. That is why it seems like everyone you know recently went to Japan. I want to go too. In local currency, Nintendo shares returned 80%, trouncing the S&P 500 by 30%.

In the decade to come, as the Yen appreciates against the dollar, American investors will be pleased with the performance of their Japanese shares. Japanese investors, however, will not like the large, negative drag on their portfolio of American assets. Now imagine the same events transpiring in Germany, England, China, etc. The American market will always be popular with foreigners as a safe haven, of course. But, on the margin, more money should start to get repatriated home. When interest rates are cut later this year and/or next year, it should perpetuate this trend further. 

When you consider the 8% per year expected returns Vanguard estimates for foreign stocks and add in the extra boost from dollar depreciation, expecting to double your money invested abroad every 7 years seems quite reasonable. Even better, you’ll outperform your American compatriots who continue to chase the dips in our overvalued domestic market.