Cautious Temasek to slow investment despite good returns

Singapore’s state investment firm Temasek reported 5.81% returns for the fiscal year ended March 31 and grew its net portfolio value to S$403 billion ($297 billion) - a new high - backed by gains from unlisted assets and domestic investments.

Gary Smith

Sovereign Focus

“The return number of 5.81% for 21/22 looks like a solid number given the global backdrop. Note that 20/21 return of 24.5% was influenced by the bounce back in global stock markets after the Covid shock, so that is the outlier number, not the 5.81%,” said Gary Smith, managing director of UK consultancy Sovereign Focus.

 

While Temasek’s investments are anchored mainly in Asia, it has increased its exposure to unlisted assets to S$210 billion - or 52% of its portfolio - as of March 2022, a four-fold jump from only S$53 billion in 2012. It is a move that has rewarded Temasek with higher investment returns (on an IRR basis) of 16.2% compared with 6.7% for its listed assets.

 

The gains from its holdings in Singapore-listed companies such as DBS and Singapore Telecommunications and unlisted firms such as port operator PSA International and utility company SP Group have managed to offset some of the declines from China.

 

However, Temasek said it expects to slow down its investment pace this year and into 2023 due to bearish sentiments and higher downside risks globally.

 

Rohit Sipahimalani

Temasek

“We are in a bear market right now in the US, Europe, and have been in China for a while. The decline in values in markets like the US has almost been entirely a function of rising rates. And we still haven’t seen an earnings decline being priced in,” said Temasek's chief investment officer Rohit Sipahimalani.

 

He added that the situation in Europe was more acute because of high inflation, slowing economic growth, tightening monetary policy, and the Russian-Ukraine conflict. As for China, it will be impacted too in the event of a recession in the US and Europe.

 

“So the economic outlook is not looking very good. We see further downside in the markets,” he said, adding that the prolonged downturn could extend to the end of the year and into 2023.

Smith agrees with the cautious approach. “It is hard to argue against this strategy. Global markets may well be hampered by the rising risk of recession, and the lingering effects of the energy price spike caused by Russia’s invasion of Ukraine,” he said.

“Waiting for cheaper prices, and a calmer global investment backdrop might well be a winning strategy longer term,” he added.

CHINA STILL AN IMPORTANT MARKET

China will continue to be an important market, said Sipahimalani.

“We’ve been there for almost 20 years. I’ve seen many cycles, and it has over the last decade been, I would say, the best performing market for us, even including the last year.”

He said the decline in Temasek’s exposure in China to 22% of its overall geographical allocation from 27% the previous year stemmed entirely from market price movements, in response to a question if the state investor had considered divesting from the country.

“We were a net investor in China last year. In fact, we were a net divestor the year before that because we saw valuations very, very high. But we have seen attractive opportunities even in this volatile environment,” he added.

_{Source: Temasek}

China provides compelling opportunities in areas such as automation, said Martin Fichtner, head of West Coast and deputy head of technology and consumer at Temasek.

“And this is very much aligned with the key trends and key themes that we have,” he said, citing digitisation as an example.

Javier Capape

IE University

Javier Capapé, director of sovereign wealth research at the IE University’s Center for the Governance of Change said the crackdown on tech companies by the Chinese authorities has spooked investors.

“It is natural to reduce exposure to a country whose regulation has been quite erratic over the last three years. The dramatic Ant Financial and Didi Chuxing cases paired with the ban on edtech profits have complicated the environment,” he told AsianInvestor.

GOING FORWARD

Aside from digitisation, Temasek will be focusing on long-term structural trends such as sustainable living, future of consumption and longer lifespans as its investment guidepost.

Sustainability will be the core of its strategy.

For example, in the area of decarbonisation, Singapore Airlines, a Temasek subsidiary, has teamed up with the Civil Aviation Authority of Singapore on a pilot to use sustainable aviation fuel. Temasek, itself, has invested S$5 billion in setting up GenZero, a decarbonisation-centric investment platform to focus on climate-driven technologies, nature conservation, and carbon ecosystem development.  

Temasek has raised its internal carbon price to US$50 per tonne of carbon dioxide equivalent (up from US$42 per tonne in 2021) and is expected to increase it progressively to US$100 by the end of this decade. 

Temasek has also forged partnerships with major industry players such as BlackRock to accelerate global efforts to transition to net zero. It is also a founding partner of Brookfield Global Transition Fund, which focuses on the transformation of carbon-intensive industries and the development of clean energy sources.

Other opportunities on Temasek’s radar include AI, blockchain-enabled solutions, cybersecurity, life sciences and alternative protein.

“Our investments and partnerships have been instrumental in helping us gain a deeper understanding into emerging technologies and business models as well as see the threats and opportunities on our broader portfolio,” said Russell Tham, joint head, enterprise development group and head of strategic development at Temasek.

Diego Lopez

Global SWF

Diego Lopez, managing director at Global SWF said: “In the next nine months, we would expect Temasek to tilt slightly towards inflation hedge assets such as infrastructure and private credit, although the activities in venture capital will likely remain high.”