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Some family offices are looking closer at emerging markets, particularly in private markets

This year brought little cheer to stocks in the MSCI emerging markets index, down – 4.4 % in the year to November against a 16.8% jump in its global equivalent. 

Over ten years, emerging markets indices have delivered a meagre annualised 5.2%, against 12.2% from the MSCI World, due to low exposures to tech, high weightings to banks and perceived economic weakness. 

Emerging market economies don’t stop growing when their stock markets fall

Hostility between China, Russia, Iran and the US could leave investors caught in the crossfire this year. New phases in the pandemic are a greater threat to health and wealth in weak economies.

Rising inflation is forcing central banks to choose between raising interest rates, or letting their currencies slide. Most active managers are mediocre, relying on desk-top valuations for price discovery. Small wonder emerging market family offices tend to park their money offshore. 

But don’t be fooled. Henry Gabay, co-founder of investment group Duet, points out emerging market economies don’t stop growing when their stock markets fall.

On the contrary, depressed stock markets give insiders a better chance to invest in private assets, or intellectual capital, on the cheap. 

Traders prey on market volatility. They are hopeless at finding diamonds in the rough.

According to Martin Rex Empacher of Yardhouse Capital: “In India, you have 1.3 billion people where the liquid equity market is only 100 large stocks. But that’s not where the opportunity is. It’s underneath. “

Meraj Alam, managing partner of venture fund Earlsfield Capital, says it took three years for South-East Asian markets to fall in love with tech. 

He has found finance from family offices to fund fintech, health, agriculture and logistics ventures and continues to unearth opportunities: “We worked out how the market would develop during Covid, and it’s travelled our way.”

Robeco, the Dutch asset manager, is using private asset expertise at its new Next Digital Billion Fund, investing in the new wave of tech companies. It sees the potential for a massive take up of opportunities:  “The world has 4.6 billion internet users, with the future majority of users living in emerging markets.”

Early-stage fundings in emerging markets are smaller than the US, but interest is growing, as opportunities in China recede. According to Earlsfield’s Alam, fintech has led to a revolution in funding India’s 10 million small businesses.

Empacher sees potential in social investment in local businesses to provide local jobs and services.  He said financial returns were equally attractive (see profile).

MTI Investment of Sweden has confirmed an IPO, driven by its success in developing social businesses in Tanzania. Its backers include the Persson family’s H&M Foundation, YardHouse and Dutch family office, DOB Equity. 

Sarjane Kempster, director of fiduciary at RBC Wealth in Jersey says the switch to ESG has become pronounced: “Meetings between dynastic families and their Channel Islands-based trustees have become increasingly dynamic, interactive and change-oriented, not least as a result of the political, social and environmental backdrop.”

According to research by Cornell University, local politics can have a depressing impact on family businesses. But local entrepreneurs know how to work out ways to turn the local system to their advantage.

Cornell says a third of the Fortune Global 500 universe now comprise multi-national companies with their roots in emerging markets.

They can access finance, contracts and local resources with the help of their friends in governments, tolerant of local monopolies and low pay. 

Carlos Slim Helú, worth $62.8 billion,  heads up a squad of Mexican billionaires, enriched by powerful trading positions in a range of sectors. Chinese entrepreneurs have been particularly adept at seizing tech-driven opportunities, and learning from the West, to gain influence.

Big changes are taking place elsewhere. Brazil’s Sao Paolo, for example, has now become a bigger hub for fintech opportunities than London.

MercadoLibre of Argentina for example, has built the most popular e-commerce site in Latin America, using mobile payments in a region with credit cards are rare.  

Its market value has tripled to $60 billion in three years. Nubank of Brazil quadrupled to $41 billion in a recent IPO. Columbian online marketplace Rappi also quadrupled its worth to $5.2 billion. 

In his latest letter to investors, Howard Marks, co-founder of Oaktree Capital, says global changes to capitalism are on the way.  “For investors, there’s a new world order. Words like ‘stable,’ ‘defensive’ and ‘moat’ will be less relevant in the future. Much of investing will require more technological expertise than it did in the past. And investments made on the assumptions that tomorrow will look like yesterday must be subject to vastly increased scrutiny.”  

To adapt to this tech revolution, family offices in emerging markets will not be able to rely on experience. But most of them are going to end up an awful lot stronger.

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