Singapore’s Temasek further boosted its North American exposure and last year underscored the region’s importance to its global strategy by opening an office in Washington, DC. But the state investor has also expressed concerns about the global market environment.

After seeing strong growth in its portfolio in the year to March 31 and hitting a record level of assets, Temasek indicated in its 2018 annual review, published yesterday, that is turning more cautious. It set out several potential economic scenarios for the coming years, including a sharp slowdown in China, a global trade war and a US monetary shock (see box below).

Such concerns may help explain why Temasek set up the Washington branch. In a video released yesterday, it explained that its new presence in the American capital would be “a listening post which will help us track and understand policy developments which may affect us in the US and globally”.

Temasek has hit record AUM

As such, Washington will be a little different from Temasek’s 10 other international offices, which were typically set up to source, execute and support investments made overseas. For example, San Francisco, with its proximity to Silicon Valley, has a strong focus on technology deals, while London acts as a regional hub for investments across Europe and the Middle East.

Such international expansion reflects a trend among other large public investment funds. Among those considering putting offices in Asia are the $151 billion Teacher Retirement System of Texas and $118 billion Canadian pension fund PSP Investments.

EXPANDING ASSETS

Temasek’s growing presence in the US also reflects its changing portfolio. North American assets accounted for 13% of Temasek’s S$308 billion ($235 billion) under management as of March 31, up from 12% last year and 10% in 2016. Meanwhile its dollar exposure has doubled to 24% as of March 31 from 12% in 2014 (and up from 19% last year). 

This has come above all at the expense of Singapore dollar exposure, which has fallen to 53% of AUM this year from 61% in 2014.

Temasek’s rising American allocation comes despite the state investor’s concern that “beyond this year, expansionary fiscal policy in the late cycle may risk a cyclical recession in the US”.

Meanwhile, the institution also continues to raise its European exposure, which stands at 9% of the portfolio as of 2018, up from 8% last year and 6% in 2014.

And Temasek has seen strong overall expansion; its AUM has exceeded S$300 billion for the first time, rising from S$275 billion in March 31 last year. This came on the back of a one-year return of 12.19% and 4.99% annualised over three.

TURNING CAUTIOUS

But the institution is aware that the coming years are likely to be challenging and sees global growth potentially slowing this year. Temasek made S$29 billion of investments last year and divested S$16 billion of assets, but said it would be more cautious in its outlay in the coming year.

“Medium term risks include rising trade and geopolitical tensions, plus monetary and financial stresses in some key economies,” Temasek said in the review. “These may dampen the potential for global growth.”

The issues in question include the escalating trade war between the US and China and moves in regions such as Europe and the US to normalise monetary and fiscal policy by raising rates and rolling back quantitative easing.

Alpin Mehta, managing director of investment, said in the report: “Given the market outlook, we may recalibrate and slow our investment pace over the next nine to 18 months.

“On the other hand, we do see a robust pipeline of opportunities for this year,” he added. “In particular, we will actively seek attractive opportunities in promising sectors and markets driven by transformational technologies, demographic shifts and changing consumption patterns.”

TEMASEK MODELS POTENTIAL SCENARIOS

Temasek’s annual review set out its 20-year expected returns in four economic scenarios.

The “Central” scenario, seen as the most likely to occur, indicates the institution's baseline expectations of growth, reflecting its views of “the most likely economic pathway”. It would create the highest returns of the four (see graph below).

The other three scenarios for which it has modelled returns are seen as less likely:

  • “China credit”, which envisages a sharper than anticipated slowdown in growth, as reforms provide too slow to rebalance the economy and address corporate debt-related vulnerabilities.
  • “Global trade war”, which models returns based on a significant increase in trade conflicts among major economies.
  • “US monetary shock”, under which the US Federal Reserve underestimates the run-up in inflation pressures and loses control over the inflation anchor, forcing it to raise rates.
Likely returns from Temasek's different scenarios
(click for full view)