Singapore sovereign fund Temasek sees political and regulatory ambiguity in the US and argues that investors underestimate opportunities in China, where urbanisation is really just beginning.

President Gregory Curl, speaking at an FT conference in Hong Kong yesterday, says he expects returns in this volatile period to be between a half and two-thirds of what they have been historically.

But he points to the fund’s focus on parts of the world where middle-income activity shows greatest potential. From a macro perspective, Temasek looks for emerging champions with a comparative advantage driven by rising middle-income population and urbanisation.

“If you look at where there are transforming economies on a regional and national basis, we are still confident that the 70% of our portfolio that is in Asia will perform at a level in excess of some other geographies,” he says.

He reveals that Temasek has, in fact, reduced its Asia exposure from 80% five years ago as a consequence of increasing its investments into Latin America from offices in Sao Paolo and Mexico City.

He says Temasek views China as a number of transformed economies, particularly in the centre and west of the country. It has interest in property companies such as CapitaMalls and others that are developing with partners in Sichuan and Chongqing.

It comes shortly after Temasek revealed plans to ramp up its investments into China's domestic securities market, having applied for a $700 million QFII quota. 

Working on where it believes growth will come from over the next eight years to 2020, Curl says Temasek has no positions in US financials and that there's no such thing as a risk-free asset.

“My personal view is that the US will represent considerable risks [over the next eight years],” he adds. “There is a huge deficit that will be monetised and what form that takes will be significant for all of us in this room.” One conclusion, he notes in a roundabout way, could be inflation.

Curl questions how much money financial institutions in the West are going to be allowed to earn in this environment, saying Temasek cannot determine what the share counts will be in these firms over time.

On the issue of energy, he views the preponderance of natural gas as a game-changer, and points to two large resources of shale oil in Sichuan and China's far west which he suggests will have a secular impact on the price of energy.

“There are two huge areas that exist [in China] and there is a massive amount of work that is being done in preparing these areas, more than people realise,” he adds. “We all know the energy requirements of China, and I have an immense regard and affection for the ability of China to recognise what they need to do to address issues like this, and I’m sure they will.”

He says Temasek favours copper and foodstuffs, and has some exposure to water security – in the sense of technologies used to extend the use of water, rather than trying to control the raw material.

On the issue of Chinese banks, Curl in unequivocal in his belief that strategically well-managed players are a profitable proxy on the continued development of country's economy. Their balance sheets are more closely tied to the real economy than banks in the West, he notes.

“We think the immediate capital requirements of large Chinese banks may not be as significant as people believe,” he says, adding that the development of China’s capital markets will take some of the pressure off banks as the only intermediaries of the economy. He also praises CSRC chairman Guo Shuqing as “very smart, very energetic and, more importantly, very stubborn”.

“There is less ambiguity about policy and regulation in China today than we think there is in the West and we are more comfortable operating on the margin.”

Temasek’s largest non-financial investment in China is in a pharmaceutical company, and Curl predicts there will be a very concentrated reformation of the country’s healthcare industry. “This is something we may take a look at with good Chinese partners because it will have to be done, the demographics will demand it.”

He makes a final point about food security in China, noting that Jilin province is one of the three best agricultural land areas in the world and that Sichuan and the country's Northeast have more resources than people believe.

“China is involved in very serious work on how to optimise those [areas],” he adds. “But the real success from China and Singapore is the development of state-of-the-art port facilities close to fields that are reaching their productive capacity without polluting. I hope you will see some pretty remarkable [progress] in that area, which we hope to be part of.”