GIC, the sovereign wealth fund of Singapore and a significant investor in European real estate, has issued its report on the management of the government’s portfolio for 2021\22 laced with references to challenges ahead.
CEO Lim Chow Kiat wrote in a letter to stakeholders: 'The investment landscape is shifting rapidly. Profound uncertainties have emerged on multiple fronts.'
'Years of concerns over deflation have turned into worries of elevated inflation, forcing economic policymakers to reverse stimulus policies. At the same time, the clock for the climate crisis is ticking, pandemic risk lingers on, and geopolitical conflicts and domestic political schisms are growing. There are no easy choices for policymakers and business leaders, and in turn, for investors.'
GIC said it had continued to generate good, stable returns over inflation, but added the macroeconomic environment had entered a high-inflation regime driven by supply chain disruptions, a rapid recovery in demand, and rising wages. In addition, the world is facing increased risk of fragmentation as geopolitical tensions continue to rise. And, sustainability tasks have become more urgent.
The CEO added: ‘Given these uncertainties, GIC has doubled down on our core investment principles - to diversify our portfolio, take the long view, and emphasise preparing rather than predicting.’
The investor also said it had established a dedicated sustainability office to deepen research into ‘key sustainability issues’ and ‘push to integrate sustainability’ into all its investment and corporate processes.
Stagflation risk
In its report, GIC highlighted the necessity to preserve and enhance Singapore’s international purchasing power for the foreign reserves it has.
It stated: ‘The rise in inflation in the US and many emerging market economies has led to rises in global interest rates as central banks tighten monetary policies and markets price in faster policy normalisation. Equity markets have seen a differentiated performance.’
Meanwhile, Russia’s invasion of Ukraine added further risks.
‘A combination of factors has increased the risk of a stagflationary environment materialising in the coming years.’
‘Central banks have started tightening monetary policy rapidly to temper the acceleration of inflation, but the trade-off is that growth deteriorates in the process.’
‘While equity markets are increasingly pricing in rising cyclical risks, they are not discounting outright recession and/or a deeper, protracted military conflict. This adds to an already challenging starting point for risk assets.’
As at 31 March this year, GIC had 10% of its asset mix in real estate. This is the fifth largest asset category after national bonds and cash (37%), private equity (17%), emerging market equities (16%), and developed market equities (14%). Inflation-linked bonds represent the smallest category by % of asset mix (6%).
Real estate was 8% of the asset mix in 2021, so this has risen by 2%.
