Dubai, United Arab Emirates
The Gulf is home to some of the richest families in the world, and therefore some of the biggest family offices. The oil-exporting nations of the Gulf Cooperation Council (GCC) have seen their treasuries swell in recent months. The International Monetary Fund (IMF) predicted last year that GCC nations received a $1.3 trillion cash windfall in 2022, owing to the stark rise in oil prices after Russia’s invasion of Ukraine.
But despite the immense firepower at their disposal, some of these family offices have been caught unawares by movements in the US stock markets driven by retail investors. An individual in Dubai, who looks after the capital markets portfolio for a prominent family office in the emirate, told Disruption Banking that “the S&P 500 is up almost 10% this year but this has been driven by huge increases in just a handful of stocks,” adding that “there’s not really a wider bullish trend.”
Indeed, several stocks have posted double-digit increases in 2023. After a torrid 2022, Meta is up 87% this year so far. Despite all the controversy surrounding Elon Musk’s ownership of Twitter, Tesla has strengthened by almost 60%. This has caused problems for some family offices because they have tended to take a defensive tilt over the last twelve months amidst global economic uncertainty. Funds have generally sought to reduce their exposure to industries such as tech and fintech, moving to “recession-proof” sectors such as healthcare and consumer staples. They have therefore missed out on benefiting from some very strong returns.
The individual told Disruption Banking that the performance of stocks such as Meta has been driven by “retail investors flooding into the market looking to double their money quickly.” Because they have done so in big enough numbers, this strategy has worked, at least on a short-term horizon. However, “there is now an increasingly large gap between what the share price should be at, looking at fundamentals, and what it is at thanks to speculation.”
The mandate of his family office, the individual added, is “capital preservation” and ensuring that the real terms value of the fund’s portfolio is maintained over years. There is a large disconnect between this mandate, which is focused on long-term returns, and the aims of retail investors seeking quick, easy money. However, retail investors, who have taken to organising themselves on social media platforms such as Reddit, are moving in such large numbers that they are becoming a whole new force on global financial markets. In turn, this is potentially making the jobs of family offices much harder.
“Smart money is worried,” the individual said. “Retail investors are causing movements on markets that we can’t really predict.”
Author: Harry Clynch
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