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Emerging markets in 2017

Why I will inevest in emerging markets this year?

During the 2016 the investments we made gave us around a 10%/12% annual return.

Here you can see the report from the last year. It's just my second year investing and even with Trump, FARC referendum, Brexit and Renzi I think we obtained really good numbers. My investments mainly focused in biotech, clean energies, some industrial and strategic telecom companies in variable income (aftermarket).

I also invested 15% of my capital in startups with the objective of creating the bases to participate in a new venture builder model. My expected temporal return horizon is +5 years.

Today I want to focus in my 2017 new investment target. After working in tech for the last three years, I ended up asking myself where this technology could create the biggest impact.

My conclusion was: emerging markets.

I'm convinced tech can really generate a difference in emerging markets, specially with the decline of prices in hardware (sensors, microcontrollers, improvement of connection, storage, capacity, fog and edge), reduction of costs using SaaS and scalable (almost free) platforms. Leapfrogging effect always had aroused my interest. But my special interest there is because data in emerging markets is expensive: is really difficult to be obtained there and more needed by corporates than anywhere else.

The technology industry has become more global than ever thanks to the ability of developers everywhere to establish operations and distribute product anywhere. Today, global software vendors are as likely to compete with companies in Sri-lanka, Singapore and other emerging markets as with companies in Tel-Aviv or Silicon Valley. If they’re not competing yet, they may soon be. It’s also just as likely that they should consider partnering with or acquiring them.

Euromonitor's report also noted that emerging market countries accounted for 85% of the world's population in 2020. And these populations are tech hungry. For instance, by 2020, its expected that 82% of the smartphones will located in emerging markets.

But why now? Because the emerging economies (probably) will not deteriorate more.

Return of investment towards the emerging market will be interesting. The emerging ones offer a "change diagnosis". This is why the perception of market becomes more accommodating with respect to them. But it does not mean that they are going to turn quickly and immediately regain their growth levels. Except from India.

During the past quarter, in India we have known how the announced reforms have been implemented and have had a positive impact on their stock markets. The biggest uncertainty was the pursuit of his monetary policy following the departure of former Central Bank Governor Raghuram Rajan. The transfer was successful. His replacement, Urjil Patel, has been governor of the RBI since 2013 and has led the Committee responsible for fixing the new inflation target. This seems to ensure the continuity of monetary policy.

After browse Seedstars applications and talking with some alumni I also see Nigeria, Colombia, Chile and Vietnam as potential hubs. The rest of the markets will require some time. Maybe a couple of years. Especially Brazil.

Russia will be interesting too, seems to continue to stabilize, although it is still far from experiencing a new boom. During the past quarter Russia has been boosted by better oil prices and stronger macroeconomic data than in previous quarters. Its GDP has decreased -0.6% in Q2, improving the -1.2% drop in Q1. We expect increased revenues and reduced spending. But against analysts' forecasts, industrial output declined in November. The anticipated indicators of the manufacturing industry also fell, equally unexpectedly. Inflation moved slightly upwards, in view of which the issuing bank left reference rates intact.

Russia is a country that is gaining in attractiveness and from which certain companies could be chosen for investment. It is still early, in my view, to gain exposure in a generalized way to the country but if its evolution remains positive it could be an interesting market.

The improvement of the emerging countries is a reality that is being reflected already in their stock markets. During the last quarter we have seen returns more than those obtained by developed countries. Even so the realities are not yet uniform. In India, a good economic cycle is being driven by reforms. China is definitely stabilizing but we still expect real signs of improvement. Growth in Brazil is still at negative rates (even BOVESPA growth) and Russia is improving considerably. Mexico. will seriously deteriorate his economy because of the new decisions of the US government.

Take a look of how the markets behaved in 2016 in the following map:

(Don't take Venezuela and some other countries seriously in the previous map the inflation plays a really important role, but it's just to understand the big picture) I will end my article with some concrete tech-based reasons why I think emerging markets will be key to technology development:

Cost, population, proximity, education, culture and community.

  • Cost: Developer salaries are low in comparison to more mature economies.
  • Population: Emerging markets have high levels of tech-savvy millennials who are likely to adopt mobile applications quickly.
  • Proximity: Software vendors can establish a foothold by becoming invaluable in the local market and then expanding.
  • Education: Excellent educational systems (think math and science in Eastern Europe) help them tackle complex software, such as security. In some regions education is a problem, but the continues growth of e-learning platforms will cover the gap.
  • Culture Employees in many emerging-market countries are hard workers as they strive to improve their economic conditions.
  • Community: Entrepreneurs are inspired by existing successes: India’s Infosys, China’s Alibaba, South Korea’s Samsung. With community hubs as Seedstars and rolemodels society will empower more and more.

If you want to see this effect you can also join us in April, the Seedstars Summit, biggest event for emerging markets.

My predictions in 2017: We will have weak bonds. Probably in Europe interest rates won't increase until end 2017 or when Draghi ends his mandate. Money moves towards the bags. The real estate consolidates. The Eurozone stagnates and the US slows down its expansion. Probably we will have social instability. Finally, I expect subdued venture investment activity in South-est Asia Europe and the US (at least this first year).

In 2017 I will start with currency purchase and maybe some small medium caps focusing in SouthAmerica (lenguage), mainly Colombia and Chile where we already have partners and we've been following the market for some months. It's true our capital will remain diversified in Spain (the market we know), but this is our first year in emerging markets.

I would also love to co-invest in some startup in emerging markets because the cost is cheaper (more equity for less money) and we can really support them from Europe (we could be useful a investor, not only capitalist), but I still need to find a company that excites me. The good point is that I will probably see the selected companies from Seedstars competition and learn a lot from them.

I will update you about how it end up. Thank you for reading.

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