SummaryThe expansion of emerging market investment opportunities available to global investors makes this asset class a key component of a diversified family office portfolio that aims for consistent compounding of capital over multiple generations.
The phrase “emerging markets” was coined in the early 1980s by an employee working at the International Finance Corporation (“IFC”), a private sector-oriented affiliate of the World Bank that aims to increase private-sector participation in less developed countries. The financial institution tracked ten stock markets’ investment performance to learn whether those markets provided attractive returns for foreign investors. As a result, Antoine van Agtmael, a Dutch trained economist working at the IFC, proposed a new global investment fund for stock markets in developing countries to investment bank Salomon Brothers in New York. The bankers agreed on the concept’s attractiveness. However, they rejected the original name for the fund: “Third World”, citing marketing challenges as that name is connected to corruption, despair, and extreme poverty.
As a result, Antoine van Agtmael pondered the criticism and came up with a new term to promote the fund: “Emerging Market”, which inspires growth, innovation, and progress.
When index provider MSCI Inc launched the MSCI Emerging Market Index in December 1987, it included ten countries. As a result, it contributed only 0.9% to its flagship global equity MSCI All Country World Index. However, since that time, the asset class has experienced dramatic expansion, and currently, the index includes 25 countries and contributes approximately 12% to the flagship equity index.
The emerging markets universe includes listed shares from various countries, including Brazil, China, India, Poland, South Korea, Taiwan, etc.
More than 160 of the nearly 200 countries globally are classified as “emerging”. These emerging economies already contribute more than 50% to the global economy in purchasing power parity terms and will likely account for 60% of the world’s economy by 2030. Emerging markets have also increased their share of global trade volume from slightly more than 30% in the early 2000s to almost 50% at present, led by the growth of China. Additionally, only 15% of foreign direct investment was destined for emerging economies in the early 2000s, and this figure is currently approaching 50%.
The World Bank forecasts 3.2% combined global real GDP growth in 2023. The most advanced economies (United States, Eurozone, and Japan) are expected to grow at 2.3%, compared to the projected economic growth rates of emerging and developing economies of 4.4%. Bangladesh (6.9%), India (6.8%), Egypt (5.5%), and China (5.3%) currently top the economic growth prospects table.
Despite the potential for superior longer-term returns, emerging market investing comes with a relatively long warning label.
At times, many of these economies still lack fiscal discipline, a commitment to price stability, are more vulnerable to political upheaval and can be victim to the unintended consequences of interference by governments in free-market mechanisms. These and other factors make emerging market investments more vulnerable to external shocks, resulting in much higher variability of short-term investment returns than developed markets.
The continued growth of emerging markets represents an important opportunity for family office investment portfolios. A thoughtful allocation to shares of companies with access to these markets could assist families aiming to achieve consistent long-term compounding of family wealth.
Mosaic Family Office is the leading provider of multi-family office services in South Africa.