Can children predict the stock market with the Pocket Money Index?

Pocket Money Index

Are the spending habits of children in the Pocket Money Index useful to reveal insights into the economy and stock market?

What can the Pocket Money Index tell us?

Do not save what is left after spending,” exhorts Warren Buffett, “but spend what is left after saving.

RoosterMoney, the pocket money app, recently revealed some interesting trends about the spending habits of the young. No longer are they spending their pocket money on books, magazines, and sweets – but online games. After all, what can they do during a national emergency lockdown? Physical leisure activities have all but stopped. School teachings are migrating online. The digitalisation of the economy is accelerating at an unprecedented pace.

According to RoosterMoney’s quarterly Pocket Money Index, a survey of 24,000 app users over quarter Apr-Jun 2020, topping the pocket money spending chart are Roblox, Fortnite, and Lego. This is the first time in recent years that video games capture the bulk of youngsters’ spending (see below).

The amount of pocket money kids are saving has also risen to a high of 43.5%, up from 38% in 2019. The annual pocket money is now estimated to be £239, or £4.60 a week.

Source: RoosterMoney

Will Carmichael, CEO of RoosterMoney, observed that the economy is  “becoming a cashless society” and that it “reflected not only our spending habits, but in that of our children too.” Moreover, he added that “what’s encouraging is that the savings rates are so high regardless of what’s going on in the world.” This is an interesting observation.

UK households appears to be putting their spending plans on hold regardless of their income fluctuations. When income uncertainty sets in, discretionary household spending falls. So kids are cutting their spending too. The Bank of England recently confirmed this observation with its survey of household expenditure. According to the latest September Office of National Statistics (ONS) data, UK household savings are rocketing.

Source: Office of National Statistics (ONS)

How to use the Pocket Money Index?

The relevant question for investors, however, lies with what the kids are spending on and whether this survey can be used as some form of an ‘indicator’.

Before we move on, some limitations of the Pocket Money survey must be spelled out.

  1. First, it is lagging indicator. The survey is only published quarterly. By the time it is published, stock prices may have already moved significantly.
  2. Two, it is a broad indicator. It does not pick out specific stocks.
  3. Three, it only sheds some narrow ideas related to the kids’ spending trends – and not the general economy.

Still, the survey points to some subsectors that are benefitting from the recent splurge of pocket money. For example, Roblox, the online gaming platform, is flourishing during the pandemic. Free to use and join, Roblox’s gaming revenue has risen as millions of its young users spend more on the platform. $100 million was reportedly spent by Roblox players in May alone.

Lego, the ever-popular brick set marker, also saw its revenue grow 7% in the six months to June 2020.

Unfortunately, Roblox is a privately-owned company. So is Fortnite’s owner, Epic Games. The major minority owner of Epic Games is the HK-based Tencent (700.HK), which holds a 40% stake.

Pocket Money flowing to online gaming, as are investor capital

So how can investors participate in the online video gaming industry?

The first way is to buy these gaming stocks directly. Since Roblox and Epic Games are not listed on public exchanges, you can only acquire exposure indirectly. Tencent (700 HK), Nintendo (7974 JP), and Activision Blizzard (ATVI US) are some big players in the global gaming corporate market. However, their shares are listed around the world making it fairly inconvenient for investors.

Another way is to buy into the sector is via the the Exchange-Traded Funds (ETFs). One such popular fund is the VanEck Video Gaming and eSports ETF (ESPO US). This $500 million fund is sponsored by VanEck and follows the MVIS Global Video Gaming and eSports Index. With about 25 stocks in the portfolio globally, this sector-focussed fund is diversified enough for investors.

Related Guide: How to invest in an exchange-trade fund

Chartwise, the fund is in a strong uptrend, having doubled from its March lows (see below).

Another choice is the Global X Video Games and eSports ETF (HERO). A smaller fund with $350 million assets under management, the ETF’s portfolio weighting on gaming stocks differs to that of ESPO’s. For instance, the fund’s biggest holding is SEA Ltd (SE US), developer of the popular game Free Fire. SEA’s massively bullish stock trend easily outperforms the wider market (see below).

But please bear in mind that when come to investing you can’t be too late. The Johny-come-lately investors would have taken much higher risk.

For example, by the time the Pocket Market Index is released investors would have missed 6-month worth of rally. Buy at $50 and at $150 entails totally different risk propositions. Better to use new price highs as a buying indicator.

Better still, ask your kids – and their friends – what are they spending their pocket money on. Who knows, you may discover the next blockbuster gaming stock.

Related Guide: How to invest in stocks

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