Singapore's GIC said that despite recent macroeconomic resilience, risks remain to the investment outlook. – The Straits Times
SINGAPORE: Stubborn inflation, heightened geopolitical tensions and China’s tepid economy have weighed on the global investment landscape, dampening medium-term return prospects and making the risk-reward ratio less favourable, said Singapore’s sovereign wealth fund GIC.
But artificial intelligence (AI) could emerge as a bright spot, with faster adoption of the technology potentially driving productivity through areas like automation, predictive analytics and improved decision-making, it noted in its annual report on Wednesday (July 24).
GIC, which manages Singapore’s reserves, said these forces drive its efforts to build a resilient and agile portfolio to guard against risks in a more uncertain investment environment while pursuing new opportunities.
The fund posted an annualised rolling 20-year real rate of return of 3.9 per cent for the period ending March 31, 2024, after adjusting for inflation, down from 4.6 per cent the year before.
In its report titled Sharpening Our Edge Amidst Challenging Times, GIC said that despite recent macroeconomic resilience, which has reduced the risk of a near-term recession, risks remain to the investment outlook.
For example, if global inflation proves more persistent than expected and even increases, central banks may not only have to keep interest rates higher for longer but also potentially raise them.
This would increase recession risks and put strain on households and businesses already struggling with high borrowing costs.
GIC also noted the risk of a more abrupt slowdown in China’s economy if the country’s property market downturn worsens.
Additionally, geopolitical risks, such as broader unrest in the Middle East, could hamper growth and increase inflation via disruptions to oil supply and trade.
The fund said that while AI offers the prospect of increased productivity, not all economies and companies are equally prepared to take advantage of it.
The pace of AI adoption, its self-improvement and regulation will be key factors, making it difficult to quantify the technology’s productivity gains.
The report also highlighted that AI adoption presents societal risks that governments must manage proactively.
The technology will cause labour displacement, with advanced economies being most exposed.
However, these same economies are better prepared to utilise AI’s potential, which can help reduce some negative impacts on the labour market.
There is also a significant divergence in AI preparedness across both advanced and emerging economies, as well as among companies.
When asked about GIC’s future investment decisions around AI, group chief investment officer Jeffrey Jaensubhakij told The Straits Times that GIC will need to understand how various companies plan to use AI, identify those likely to use it effectively, and determine the key characteristics of these companies.
“It’s not only looking at how often they mention AI in their earning transcript, but actually going in and trying to understand if historically, have they been able to adopt technology changes in an effective way, and kind of lead the rest of the market,” he said.
GIC has invested in several AI-related companies in recent years. In May, it led a US$105 million (S$141 million) funding round for Singapore-based data and AI start-up Atlan, and in September 2023, it participated in a US$500 million funding round for US-based data intelligence start-up Databricks.
Jaensubhakij also noted that countries and companies effectively utilising AI will soon stand out from those that do not.
This will enable GIC to divest from companies that cannot execute AI effectively and invest in those that can.
He said: “The risk to AI is that we have to watch carefully if countries or companies are going to be left out... Once you lose market share, you won’t have the vibrancy or the flow of income that allows you to support that country and company, and you could fall further behind.”
Looking ahead, GIC said the investment environment will be shaped by structural changes that will persist over the long term, including sticky inflation, climate change, scepticism towards multilateralism, and persistently high interest rates that will put pressure on highly indebted governments, companies and households.
Overall, the era of very low inflation and interest rates is most likely over, and investors now face an uncertain world, which will likely lead to weaker returns in the coming years, it added.
GIC said it has diversified its investments to a more “granular” level in recent years. This means that instead of targeting entire industries, the fund has been identifying and investing in specific companies within sectors that demonstrate growth.
It has also been employing a “total portfolio” approach, recognising that the uncertainty of long-term market returns requires a more comprehensive response.
It said: “This approach revealed a need for diversification to protect against rising inflation risks, resulting in an increased allocation to real estate and infrastructure as they often have resilient cash flows backed by inflation-linked revenue contracts.
“Concurrently, in public markets, GIC has increased its allocation to liquid return streams that offer inflation protection. This includes commodities and commodity-related equities.”
GIC chief executive Lim Chow Kiat noted that investors are now in uncertain terrain and must rely on their purpose and unique strengths.
“In GIC’s case, our purpose – to preserve and enhance Singapore’s foreign reserves for the long term – means staying disciplined and diversified,” he said. – The Straits Times/ANN
