Singapore’s GIC said it is seeking out “alpha opportunities” in Asia’s emerging markets, but the sovereign wealth fund expects low and volatile returns from bonds and equities to persist for a while.
“The current environment features high asset valuations, a “lower-for-longer” path for future interest rates, subdued global growth, limited cyclical runway, elevated political and policy uncertainties, and underlying financial vulnerabilities, with risks tilted to the downside,” Prakash Kannan, GIC's chief economist, told AsianInvestor. “This points to low and volatile returns in the future.”
As many countries struggle with second and third waves of Covid-19 infections, there are also concerns about how long the pandemic will last. A prolonged economic crisis would accelerate default rates of global listed companies and increase the prospect of industry consolidation as investors increasingly select more resilient balance sheets and business models, Kannan said.
GIC does not specifically reveal the size of its asset portfolio, saying only that it is "well over $100 billion", but analysts estimate to be about $400 billion. The fund reported a 20-year inflation adjusted annualised return of 2.7% up to March 31, down from 3.4% the previous year. That figure was likely negatively affected by sustained global equity drops in March.
Kannan said GIC believes more difficult conditions lie ahead.
“The fundamental economic and earnings growth outlook is also expected to be modest,” he added, noting that there is limited evidence so far that nations are planning many structural reforms to counter these trends.
Most economies in the region have focused on quantitative easing and maintaining loose monetary policies, instead of trying to boost corporate competitiveness and improve the overall business environment.
One result is that the interest rates of many Asian and western nations have dropped to record lows. GIC believes that this could lead to an increased risk of inflation over the medium term, and Kannan said that swings in currencies could play a larger role in asset returns for global investors.
He noted that even before the onset of the Covid-19 pandemic GIC had shifted to a defensive investment portfolio, due to concerns “about high valuations, weakening fundamentals, limited policy room, and growing geopolitical uncertainties”.
“In the last few years, we have reduced our allocation to equities in favour of cash at the total portfolio level, and underwritten investment transactions with more caution,” Kannan added.
GIC’s portfolio allocation to developed and emerging market public equities fell by four percentage points respectively to 15% and 14% as of March 31. Meanwhile, allocations to bonds and cash rose to 44% from 39% and inflation-linked bonds to 6% from 5%.
ACTIVE ASIA INTEREST
Given these challenging market conditions, Kannan said GIC is seeking to maintain a cautious macroeconomic view while “proactively sourcing attractive alpha opportunities with good risk-reward”.
The fund is particularly looking for investments in emerging Asia consumption-based sectors such as financial services, healthcare, education, and technology, where there is “greater potential for active management”.
GIC had 19% of its AUM invested in Asia ex-Japan as of March 31, the second-highest holding after a 34% allocation to US assets.
Its interest in emerging Asia is not surprising. According to consultancy McKinsey, 43% of the world’s largest companies by revenue have their headquarters in the region. Additionally China, Asia's biggest economy, is predicted by the IMF to grow above 5% a year between 2021 and 2025, well ahead of any other major economy.
In addition, Beijing has continued to liberalise its financial sector, offering a widening array of investment possibilities. BlackRock and Singapore’s state investment fund Temasek Holdings have just gained approval to jointly build a China asset-management business along with China Construction Bank.
Outside of China, GIC has recently made a reported tie-up with Singapore listed Yanlord Land Group, announced on August 4, to invest in residential projects in China. The sovereign wealth fund, together with BlackRock, also bought shares in India’s Bandhan Bank after its shareholder sold INR106 billion ($1.4 billion) of its stake, according to Bloomberg.
In addition, on August 24, Yidu Tech, a Chinese big data and AI-powered healthcare solutions provider backed by GIC and e-commerce and communications company Tencent, filed for an initial public offering application on the main board of the Hong Kong Stock Exchange.
“Technology is another area where our investing efforts have expanded, as it disrupts traditional industries and spawns new businesses,” said Kannan. “We look to gain from investing in winners of technological shifts.”
GIC, which is widely seen as one of the most sophisticated investors in Asia, is also one of the most active sovereign wealth funds in venture capital and private equity investment. Its private equity allocation climbed by two percentage points to 14% for the year ended March 31.
Beyond Asia’s emerging markets and technology, GIC has been actively looking at non-traditional sectors, such as data centres. Strong growth in data consumption and public cloud data storage will drive secular demand, said Kannan.
The sovereign wealth fund has partnered with Equinix to form a joint venture worth more than $1 billion to build three data centres in Japan for the cloud computing market. The deal, announced in April, followed a similar $1 billion venture in 2019 to develop and operate hyper-scale data centres in Europe.
In global credit and fixed income, GIC is targeting segments where pricing is reasonable, and risk-adjusted returns are attractive.
“In the last few years, we have focused on providing selected companies with bespoke financing options across the capital structure,” Kannan said. These could include corporate bonds and loans, convertible bonds, hybrid securities, and securitised or structured credit.