Temasek posts worst returns in 7 years as it eyes AI, green transition
Singapore state investment company Temasek has posted its most disappointing one-year shareholder returns since 2016, recording a drop of 5.07% in Singapore dollar terms.
The value of its portfolio also slipped, from S$403 billion (US$300 billion) to S$382 billion (US$284 billion), a decline of 5.2%.
The company attributed the lacklustre results for its 2022-23 financial year to higher interest rates and lower equity valuations in both the public and private markets.
Gary Smith, managing director of research, analysis and advisory firm Sovereign Focus, said he wasn’t surprised by Temasek’s results, and that currency movements would have played a part in driving returns into negative territory, as they did at Singapore’s central bank, which last week reported a net loss of S$30.8 billion.
CURRENCY CRUNCH
“Temasek reports in Singapore dollar terms, and the value of non-Singapore dollar investments, which is substantial, has gone down versus the Singapore dollar, which is strong,” he told AsianInvestor.
Temasek’s investment activity also cooled to a net S$4 billion, far below the previous year’s S$24 billion, just under half of its average over the past decade.
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Chin Yee Png, Temasek’s chief financial officer, told reporters at a press event during which Temasek released its results, that the company had adopted a cautious approach to investing, an approach that Rohit Sipahimalani, Temasek’s chief investment officer, said would continue to see a “moderate” pace of investment amid a tough macroeconomic environment.
Sipahimalani said that despite the results, and a strong likelihood of a recession in developed markets, bright spots remained.
“The biggest surprise in the last few months has been generative [artificial intelligence], which has pushed the S&P 500 into a bull market, and the wealth from that rally also adds to consumer confidence and spending,” he said. “AI should also lead to an increase in investment activity.”
DEVELOPED MARKET APPEAL
“You should also see fiscal policy in the US supporting investment spending – for example, industrial policies like the [Inflation Reduction Act], which is leading to significant investments in the green transition.”
Sipahimalani said that despite tight credit conditions, Europe was among the developed markets that remained potentially attractive to Temasek, which has doubled its portfolio allocation to Europe, the Middle East and Africa over the past decade and more than doubled its allocation to the Americas.
“Valuations in Europe are still quite reasonable, at around 12 times earnings, [which] makes the risk/reward more balanced,” he said. “We continue to see opportunities to invest in high-quality companies that are global in nature, that can withstand incoming shocks, and also companies in Europe that will benefit from the green transition.”
Smith said Europe had become attractive once again due to the fact its lengthy period of ultra-low or even negative bond yields had been reversed.
“I'm sure most international investors have looked afresh at euro-denominated bonds, having basically shunned them for a period of time because rates for a while were actually negative," he said.
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Sipahimalani said that China would also remain a major investment destination for Temasek, despite its reopening having produced a slower recovery than expected.
“The only engine that we rely on to achieve our growth targets for this year [in China] is consumption,” he said, adding: “China's trading at less than 10 times price-to-earnings, which is more than one standard deviation below historical averages, so while those averages exist, for long-term investors there will continue to be opportunities to invest in China in either areas of domestic consumption or other sectors where China has leadership – for example, electric vehicles, and that implies supply chain.”
CHINA TENSIONS
Nevertheless, he sounded a note of caution in respect of geopolitical pressures that have grown in the past several years, particularly centred around China.
“We need to apply a geopolitical lens to all our investments,” he said. “For example, we couldn’t invest in areas that are in the crosshairs of US-China tensions.”
Sipahimalani also said Temasek needed to look at AI and the green transition and the impact of both on all of its investments, both in its existing portfolio and new opportunities.
Smith said Temasek had solid credentials when it came to the green transition, thanks in part to a $50 per tonne price it had applied to carbon.
“It’s reasonably aggressive,” he said. “And it’s made a commitment to increase, progressively, that carbon price to $100 per tonne by 2030, so I think it’s fair to say it’s a trailblazer in terms of investment with climate considerations in mind.”
Leo Krippner, a research fellow at Singapore Management University’s Sim Kee Boon Institute, said that Temasek was in a strong position to achieve its green goals, thanks to its sheer heft.
“Temasek has outlined its view that by 2030, the companies it’ll be investing in will have half the carbon footprint of what they had in 2010, and then by the time it gets to 2050, the carbon footprint will be zero,” he said.
“It’s sending a message to companies that,‘You shouldn’t expect that we’ll continue to invest in companies that are not doing their bit.' The fact that Temasek, which is is such a large fund, has actually laid it out over such a long timeline means that companies really have to take it seriously.”