GIC warns of potential downturn, cuts public equities exposure

The sovereign wealth fund – which claims to have invested well over $100 billion while independent assessments put its wealth at more than $300 billion – increased its private equity allocation from 11% to 12% for the year ended March 2019, the latest annual report shows. Investments in nominal bonds and cash went from 37% to 39% and emerging markets equities from 17% to 18%, offsetting a four percentage-point drop in developed market equities to 19%.

Chow Kiat Lim, GIC’s CEO, noted that expectations of a synchronized global recovery have withered, and the investment landscape continues to point to low and volatile returns. Markets are beset with uncertainty over future US monetary policy – with interest rates likely to remain lower for longer – ongoing trade tensions between China and the US, political and policy fragmentation in Europe, and the long-drawn Brexit process.

“This has discouraged businesses from undertaking longer-term capital expenditures, which has in turn contributed to weak global growth. Should the policy uncertainty lead to a deeper economic slowdown, major markets such as Europe and Japan would have little policy ammunition to respond and are therefore likely to experience a more protracted downturn. Emerging markets on the whole have more policy room to cushion against a global slowdown, though economies with larger imbalances and vulnerabilities could be exceptions,” Lim said.

GIC is responding to the conditions by placing more emphasis on its long-term investment approach. It remains bullish on the prospects for Asia in this timeframe, with growth – powered by emerging economies – expected to outstrip other regions. This is based on increasing urbanization and middle-class growth; investments in infrastructure and human capital; and deeper regional integration through trade flows and the continued opening of capital markets to foreign investors.

At the same time, slow structural reforms, geopolitical tensions, and labor, natural resources and environmental constraints are identified as challenges that could hold back Asia’s progress. About 40% of GIC’s overall portfolio is in Asia – more than most global institutional investors – and it expects the region to present attractive opportunities in areas such as financial services, healthcare, education, and technology.

The sovereign wealth fund’s investment framework comprises three building blocks: a reference portfolio, currently 65% global equities and 35% global bonds, based on long-term risk appetite; a policy portfolio that offers balanced exposure across different asset classes and envisages an 11-15% private equity allocation; and an active portfolio comprising strategies in which managers add value to the policy portfolio while broadly maintaining the same level of risk.

GIC’s 20-year annualized return for the same 12 months was flat at 3.4%. This follows three consecutive years of declines. The group reiterated that strong returns from the beginning of the tech bubble period in the late 1990s have dropped out of the 20-year window, deflating the headline performance number.

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• Topics
• Southeast Asia
• LPs
• Performance
• Singapore
• GIC Private