Panel III: BRICS economies and the commonalities of change
The BRICS economies, which between them represent 40% of the world population and 32% of its GDP, are a powerful force for the private banking industry as their economic engines drive wealth creation. But they are all distinct markets with their own unique opportunities and challenges.
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Private bankers in the BRICS economies are dealing with a twin challenge: educating their clients on the rigours of professional asset management at exactly the same time as the sands are shifting in the domestic investment environments where those clients have made their wealth.
The nuances are different in each BRICS economy, but the sense of change is common to each of them.
“These are very diverse markets from a wealth perspective and that’s something we shouldn’t forget,” says Maya Imberg, senior director for thought leadership and analytics at Wealth-X. “But as we track these individuals around the world, we see that there are certain commonalities.” These include a demand for professionalization, both in terms of their own approach to investment and the sophistication of their advisers; a trend to digital offerings; interest in private equity and environmental, social and governance (ESG) criteria; and diversification.
In Brazil, for example, investors have seen their pool of available returns completely reshaped in the last few years.
These are very diverse markets from a wealth perspective and that’s something we shouldn’t forget
“Brazil is living through a very big transformation in its macro environment, where interest rates – and real interest rates – have become negative for the first time, maybe in decades, maybe in a century,” says Rogerio Pessoa, head of wealth management at BTG Pactual.
This is a major change for a country that for several decades has been associated with extremely high levels of inflation and nominal interest rates. It used to be the case that people could make 14% or 15% yields just by holding government bonds, he says. “All the major banks in Brazil were issuing these bonds. So it was easy just to allocate 80% of your portfolio there. Why would you bother risking equity or private equity?” Those days are gone. “It’s not that it came down from 5% to 2%. It’s come from 14% to 2%.”
Consequently, Brazilians who once had a very easy decision to make on where to put their money now have to look further afield.
“These things have led asset allocation in Brazil to transform dramatically,” says Pessoa. “What used to be maybe 10% to 15% asset allocation to local equity has shot up to almost 30%.”
At the same time, technological transformation has prompted more and more people to trade stocks digitally: he estimates around 3.3 million, a fivefold increase over the last two years.
India has also undergone considerable change, but here the Covid-19 pandemic struck during a time when investors were already conservative in the light of a previous shock.
Brazil is living through a very big transformation in its macro environment
“In the last two years, Indian markets and the financial industry have gone through very turbulent times, starting with the debt crisis that happened in 2018,” says Oisharya Das, chief executive officer of Kotak Wealth Management. “We’ve seen very volatile markets since then both in debt and equity and it has impacted everybody across all segments.”
Wealth creation in India is not as new as it is in some other BRICS economies and a level of sophistication already exists among the high net-worth community. “We are seeing asset allocation being followed as a principle by most families in the private banking space,” Das says. “Most investors have matured over the years to know that they should not be panic selling.”
Consequently, she says, allocations are largely just to debt and equity and, within that, the more risk-off positions. Interests in the debt space are in high-quality names with low-credit risk, ideally triple-A paper. And on the equity side: “It is the same principle of looking at healthy companies with good management and high corporate governance, with earnings visibility over the long term.”
Historically, gold is a far more popular investment in India than elsewhere in the world for cultural as well as investment reasons. In the current strained environment it is a sensible asset class to invest in. “You’re seeing gold as an asset class really play out for a large number of families,” says Das. “They’re looking at it as a hedge more than anything else in these uncertain times.”
India is a mature enough market for some families to be looking beyond regular asset classes and investing in alternate, she says: to private equity, hedge funds, real estate investment trusts and direct commercial real estate. But still, the emphasis now is on conservatism.
Russia offers a different dynamic again. Wealth creation here was impeded until the 1990s because officially there wasn’t any wealth. “Russia is a relatively new wealth management market,” says Veronika Zhukova, managing director of Sber Private Banking. “During the USSR times, obviously we didn’t have any open markets. Anything we see now is new for people.”
That has an impact on how wealth tends to be approached today. “Wealth is quite new for us,” she says. “Before that, everyone was equal and there was no personal wealth. So a lot of the wealth that has been created recently over the past 30 years, initially clients preferred keeping it safe in deposit accounts.” Zhukova cites market research showing that wealthy families in Russia have only had about 20% of their assets invested.
This has changed over time. “We went through a similar curve to India,” says Zhuokova. First, investors discovered fixed income, then, gradually, equities. “And now we’re seeing quite a big interest in alternatives, whether it’s commodities, private equity, hedge funds or commercial real estate.” It is the same path as other markets tend to follow. “We see some of the same trends as everywhere else in the world but with a delay.”
Today, like Brazil, there are signs of a dramatic change in digital engagement with the equity markets. Zhukova says that there were around three million registered investors on the Moscow Stock Exchange by the end of 2019. Today, the figure is over six million, driven by falling rates, Covid-19, volatility and regulatory changes allowing more instruments to be open to regular investors.
With these changes has come a greater thirst for advice. “Diversification and asset allocation are very important parts of our conversation now.”
Diversification and de-risking across geographies and currencies is an emerging trend
All three of these bankers, as well as their peers in China and South Africa, report an increasing interest in international assets. In China, this has traditionally been restricted by the closure of China’s capital account, but increasingly there are mechanisms for Chinese capital to engage with the rest of the world and private banks both local and international are at the forefront of facilitating this engagement.
BRICS clients: “All naturally tend to be home biased at first but with professionalization are becoming more focused on opportunities for more diverse asset allocation and exposure to other regions,” says Imberg.
India in particular has a long-standing track record of international investment, in keeping with the distribution of the country’s diaspora.
“A large part of family wealth is in domestic investment, but very often the next generation of a family has set up businesses abroad,” says Das. “So they are often looking at creating offices internationally; children who are settled abroad are buying properties or looking at global equity,” often through international mutual funds and exchange-traded funds (ETFs). “Diversification and de-risking across geographies and currencies is an emerging trend.”
In Brazil, sending wealth overseas used to be the norm, for political and macroeconomic reasons, and due to the volatile currency. “Gradually opportunities arose to invest at home, at which point asset allocations shifted towards the local,” Pessoa says. Now, with interest rates falling, “the interest of Brazilians to invest abroad has come back.”
That raises challenges because of foreign exchange volatility, but it is no longer necessary for Brazilians to move their funds to international accounts overseas in order to gain global exposure. “The local market in Brazil has sophisticated itself in terms of what you can buy internationally through a local vehicle,” Pessoa says. “You can buy most ETFs, international funds, bonds.”
There is a similar situation in Russia, where Zhukova says on average wealthy families keep 50% of their wealth onshore and 50% offshore. She notes, however, that appearances can be deceptive. Even a client with 70% of their wealth held in Russian local instruments may have their majority of their investment in foreign currency and foreign assets, it just happens to be within a local framework. “There is a lot of demand for expertise on how to manage their Russian portfolio in the best way,” she says. “We see more and more diversified portfolios structured locally.”
We see more and more diversified portfolios structured locally
Several other trends commonplace in the west are taking hold in the BRICS economies: the popularity of family office structures, the importance of ESG, digital adoption (particularly among younger clients) and succession planning.
“The vast majority of the wealthy in these countries are self made,” says Imberg. “They haven’t inherited that wealth.
“We are seeing the beginning of this huge wealth transfer across generations and that’s expected to be enormous over the next two decades.”
Some of these things are quite new in emerging markets. “It’s not like the wealth has been passing from generation to generation,” says Zhukova.
Das says Covid-19 prompted people to look at succession, perhaps something they had been putting off. “We saw a lot of clients who had time to introspect because they were sitting at home,” she says. “They started looking at succession planning, because they had time on their hands to do that.” She also saw philanthropic activity.
“Earlier there was no concept of trusts. Now we see family constitutions and trusts getting created, because families want to pass on their wealth seamlessly, to be managed in a particular manner for many generations after them.”
Both she and Pessoa have seen ESG gathering pace. “We see a lot of clients working directly on investments in the social impact space, whether in the field of agriculture or water or pollution, to make sure the environment is something they leave the next generation with a cleaner, better place to live in,” says Das.
And Pessoa reports huge interest in ESG and impact investing among younger generations across Latin America. “These are the next generation of clients, running their single office families, who are not just looking for returns and yields and performance,” he says. “It’s very different from philanthropy: they do definitely want to make a return out of it, but they also want to make an impact in the economy.”