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GIC cautious in light of challenging investment outlook; returns for 20-year period at 3.4%

Jeffrey Tan
Jeffrey Tan • 5 min read
GIC cautious in light of challenging investment outlook; returns for 20-year period at 3.4%
SINGAPORE (July 8): Singapore’s sovereign wealth fund GIC is treading carefully as the investment outlook turns more challenging. This comes as high valuations, slowing global growth and significant uncertainties could potentially lead to lower returns
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SINGAPORE (July 8): Singapore’s sovereign wealth fund GIC is treading carefully as the investment outlook turns more challenging. This comes as high valuations, slowing global growth and significant uncertainties could potentially lead to lower returns for both the GIC Portfolio and the Reference Portfolio, the SWF says in its 2018/19 annual report released on July 2.

Certainly, the pressure is on GIC to generate attractive and sustainable returns after it received an injection of funds totalling $45 billion from the Monetary Authority of Singapore in May. The funds are derived from MAS’ official foreign reserves, which the central bank had deemed as excess OFR that could be put to better use under GIC.

Among the main reasons for GIC’s cautious stance is the unresolved trade conflict between the US and China. While both sides have recently avoided an escalation of the conflict, a trade deal remains to be signed.

In particular, US President Donald Trump merely delayed imposing tariffs on Chinese imports worth US$300 billion ($406.8 billion), after meeting Chinese President Xi Jinping on the sidelines of the G20 summit on June 28 and 29. Meanwhile, the restrictions imposed on Huawei Technologies have yet to be ­resolved completely, though Trump has relaxed some of it. The situation could easily worsen again.

“We’re concerned that this can turn out to be a very prolonged scenario of a kind of inability to agree to a deal, resulting in de-globalisation and resulting in companies needing to change the way they operate,” says GIC CEO Lim Chow Kiat. “Partly because of that, we’ve turned more defensive.”

That aside, GIC is cognisant of the fact that developed markets (DMs) are now closer to late cycle, particularly in the US, with economic and corporate earnings indicators showing signs of slowing. This is compounded by growing financial vulnerabilities owing to high corporate and non-bank leverage, poorer credit quality and untested liquidity risks, it adds.

Moreover, China’s economy is weakening. GIC says it expects growth in the country to moderate amid weaker labour force growth and ongoing efforts to reduce the build-up in debt while managing trade tensions with the US.

Towards that end, GIC reduced its portfolio allocation to DM equities to 19% as at March 31, 2019 from 23% a year ago, but increased its holdings in nominal bonds and cash to 39% from 37%. The SWF also raised its exposure to emerging market (EM) equities and private equity to 18% and 12%, respectively, from 17% and 11% a year ago. GIC, however, maintained its portfolio allocation to inflation-linked bonds and real estate at 5% and 7%, respectively.

From a geographical perspective, nearly one-third of GIC’s investments are in the US. This is followed by Asia excluding Japan at 20%. GIC’s assets in the eurozone and Japan each made up 12% of the allocation.

GIC’s performance in recent years is best described as moderate. The SWF generated an annualised real rate of return of 3.4% for the 20 years ended March 31, 2019. This was the same as last year’s performance and the worst since the global financial ­crisis erupted in 2008.

Despite the challenging outlook, GIC says it sees opportunities in Asia. This is because there is still room for urbanisation and middle class growth, especially in Asian EMs. Secondly, investments continue to pour into infrastructure and human capital. And there is deeper regional integration among the different countries.

An example is Vietnam. The country is benefiting from an increasing number of companies looking to relocate their manufacturing facilities outside of China, Reuters quoted GIC chief investment officer Jeffrey Jaensubhakij as saying. GIC has invested in Vietnamese conglomerate Vingroup.

“While Asia has challenges to overcome, GIC is confident that these can be addressed, in particular through sustained structural reforms. As an early and steady investor in the region, we have learned valuable lessons and will continue to strengthen our capabilities and partnerships. This will help us play a positive role in Asia’s growth over the long term,” it says.

GIC also sees pockets of opportunities in DMs. On July 1, the SWF announced that it had entered into an 80:20 joint venture with data centre company Equinix to acquire and develop six hyperscale data centres in Europe for more than US$1 billion. The JV will acquire two operational data centres in London and Paris, which together deliver about 31mw of critical power to customers. It plans to further ­develop four data centres in Amsterdam, Frankfurt (two sites) and London. When fully developed, these initial six facilities will provide about 155mw of power capacity. Equinix will develop, operate and manage the data centres.

On the same day, GIC also said it would, together with Brookfield Infrastructure, acquire US freight railroad owner Genesee & Wyoming for about $8.4 billion. The transaction will result in G&W becoming a privately held company. Under GIC, G&W will continue to focus on world-class safety and outstanding service, while pursuing the company’s strategic goals.

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