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This leads to a lower return environment and requires a more granular investment approach.

GIC’s Actions

Portfolio Level

  • Adopted a total portfolio mindset and integrated market and active returns, creating a more holistic and flexible approach to allocating capital.

Organisational Level

  • Our global offices enable GIC to seize opportunities and partner with the best in every market we operate in.

  • GIC has several cross-asset class country and thematic business groups to generate deeper insights.

  • Our Integrated Strategies Group invests across public and private markets and actively expands GIC’s universe of opportunities.

Team Level

  • Our private market teams have further raised the bar for new investments to ensure GIC is well-compensated for increased risks.

  • Our teams have been building capabilities to generate insights from data.

Over the past 40 years, investors have benefited from an environment of declining interest rates, lower inflation volatility, and the expanding scope of globalisation. With growing geopolitical risks, higher inflation, and slower growth in emerging economies, these tailwinds have not just abated but left investors facing profound uncertainties and risks. In this environment, GIC must continue to leverage our unique advantages, including our long horizon, diversified portfolio, and alpha-generating capabilities.

GIC’s total return for its portfolio comprises both market (beta) and active (alpha) returns.

Since the Global Financial Crisis (GFC), returns for a balanced portfolio that has 65% equities and 35% bonds have been exceptionally strong (see Figure 1).

Figure 1. Global 65/35 Cumulative Excess Return by Decade

Source: MSCI, Bloomberg, St Louis Fed, GIC Calculations

  • Low and stable inflation

  • Low interest rates

  • Large expansion of central bank balance sheets

This was aided by a range of

tailwinds,

all set against a benign geopolitical backdrop. Many of these are either fading or turning into headwinds.

Investors now face a world with growing geopolitical risks, higher inflation, and slower growth in emerging economies. The result will likely be weaker returns in the coming years.

Tailwinds turning to...

headwinds

  • Growing geopolitical risks

  • Higher inflation and interest rates

  • Slower growth in emerging economies

Growing Geopolitical Risks

Following the end of the Cold War, the so-called ‘peace dividend’ helped to boost economies and paved the way for increased globalisation.

The most notable developments were the 1994 General Agreement on Tariffs and Trade (GATT) and the formation of the World Trade Organisation (WTO) in 1995. Global tariffs halved from 5% in 2000 to 2.6% by 2017. Increased globalisation led to optimised supply chains, rising trade, and large investment flows.

Today, geopolitical uncertainty has increased sharply (see Figure 2), fuelling rising economic nationalism as nations strive to control their own resources and markets.

This dynamic is reversing the post-Cold War trend of ever greater global economic integration.

Figure 2. World Geopolitical Risk Index

Source: MacroBond Financial, Dario Caldara and Matteo Iacoviello (2022), Measuring Geopolitical Risk

Globalisation has stagnated since the GFC and reversed since COVID-19 as businesses and countries seek to increase supply chain resiliency (see Figure 3).

Figure 3. Global Trade / Industrial Production

Source: MacroBond Financial, Netherlands Bureau for Economic Policy Analysis (CPG), GIC calculations

Rising global trade relative to industrial production showed the increased growth in global supply chains up until the GFC.

Higher Inflation and Interest Rates

GIC’s focus is on real returns adjusted for inflation. During the first two decades of this century, the average global inflation rate was low due to factors such as globalisation and expanding labour pools.

This compressed asset risk premia and boosted investment returns.

Technological advancements, such as the advent of the internet and mobile communications, improved productivity and expanded markets further.

Looking ahead, inflation is expected to be structurally higher for a few reasons...

COVID-19

Transition to a Net-Zero Economy

Aging Population

First, COVID-19 has reinforced the emphasis on supply chain resiliency, which will inevitably increase costs.

Second, the transition to a net-zero economy requires an annual investment between US$4.5 trillion to US$4.8 trillion per annum over the next three decades, compared to US$1.8 trillion in 2023. Physical risks to infrastructure and assets due to climate change and increased adverse weather events could place further cost burden on the global economy.

Third, demographic tailwinds are weakening as populations age. This will likely increase wage pressures as labour forces decline.

Collectively, these factors point to inflation staying structurally higher versus the pre-COVID period, even though cyclically, levels have fallen from the peaks in 2021 and 2022. Technology, including artificial intelligence (AI), can provide some counterbalance but it is likely to be insufficient. Overall, the era of very low inflation and interest rates is most likely over.

Slower Growth in Emerging Economies

Many emerging economies will be impacted by this pattern of deglobalisation and resource competition. This is because external market access will be restricted, leading to fewer knowledge spillovers, reduced technology dissemination, and shorter supply chains.

There is, however, a silver lining. Supply chain resiliency and ‘China+1’ strategies will see some emerging markets benefitting from the need for manufacturing diversification. Countries with more favourable demographics, robust domestic demand, and the ability to benefit from supply chain diversification will be well-positioned for strong growth.

Implications

for GIC

These macro headwinds pose challenges to our portfolio. Increased geopolitical risks and an unfavourable policy environment will lower returns. In addition, a higher inflationary environment erodes real returns, increasing the emphasis on inflation-resilient assets. Similarly, the diverging outlook across emerging economies will require a finer-grained approach to investing across these markets.

GIC must continue to maximise our unique advantages to deliver on our mandate of preserving and enhancing the international purchasing power of the reserves under our management. These advantages include our long horizon, our diversified portfolio comprising both public and private markets, and importantly, our alpha-generating capabilities.

Our responses can be broadly put into three levels of actions: portfolio, organisational, and team.

Portfolio-level Actions

Since 2013, we have adopted a beta-alpha separation framework to take advantage of the distinct natures of the return streams. Beta, or broad-market, returns are time-based, while alpha, or active management, returns are organisation- and skill-based. Then, we were one of only a handful of long-term investors using such a framework to construct portfolios. Today, it is a more common approach to capital allocation, although the exact implementation varies among investors. Several years ago, we initiated a review of our total portfolio capital allocation process when we recognised that the uncertainty of long-term market (beta) returns would require a total portfolio response.

Since 2013, we have adopted a beta-alpha separation framework to take advantage of the distinct natures of the return streams. Beta, or broad-market, returns are time-based, while alpha, or active management, returns are organisation- and skill-based. Then, we were one of only a handful of long-term investors using such a framework to construct portfolios. Today, it is a more common approach to capital allocation, although the exact implementation varies among investors. Several years ago, we initiated a review of our total portfolio capital allocation process when we recognised that the uncertainty of long-term market (beta) returns would require a total portfolio response.

Adopting a total portfolio approach has enabled us to take a more holistic view when allocating capital to granular investment opportunities while also assessing the impact on portfolio diversification. Where previously, we would keep our beta exposures largely unchanged and focus on varying strategy alphas, we now emphasise the combined prospects of both beta and alpha. Our total portfolio approach gives us the flexibility to adjust our asset allocation in response to changing market conditions and emerging risks and trends, diversifying into asset types beyond those specified in the policy portfolio and to areas with the most favourable risk-return profile, while also enhancing portfolio resilience.

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.

It has also helped us to more clearly identify competitive advantages. For example, in private equity where our long horizon, strong partnerships with top quartile fund managers, ability to invest directly and provide value-add, as well as local presence across four continents creates opportunities for the GIC portfolio.

Organisational-level Actions

To tackle the macroeconomic headwinds, we need to identify granular investment opportunities that will generate good long-term returns above global inflation.

To tackle the macroeconomic headwinds, we need to identify granular investment opportunities that will generate good long-term returns above global inflation.

Local Insights and Leading Partners

Our global offices enable GIC to seize opportunities and partner with the best in every market in which we operate. We established our first global office in New York 40 years ago. Since then, we have expanded our international presence to include nine other cities: San Francisco, Tokyo, London, Beijing, Seoul, Shanghai, Mumbai, São Paulo, and Sydney. This large network has enabled us to gain valuable insights and, more importantly, build enduring relationships with leading partners.

We work with long-term partners on many fronts. For example, we may have multiple exposures to the same external manager across asset classes. For investee companies, we can be their shareholder, bondholder, landlord, or joint-venture partner. We strengthen the overall ecosystem of partners by promoting long-termism, such as by convening top leaders to exchange insights at networking initiatives. These include annual events such as GIC Insights, which brings together business leaders to discuss long-term issues, and our Silicon Valley-based Bridge Forum, which brings together start-ups and established businesses for meaningful engagements on tech innovations.

Deeper Insights Through Collaboration

GIC’s growing sustainability efforts are a prime example of both our approach to collaboration and provision of long-term, flexible capital. We established our Sustainability Office in 2022 to harness diverse ideas across asset classes. In 2023, we formed focused groups within asset classes to seize climate-related investment opportunities. One of these groups is the Sustainability Solutions Group (SSG) in our Private Equity department. This year, SSG launched an investment programme for green assets. It is the result of us identifying a funding gap for nascent or maturing climate technologies such as green steel and battery storage. This is an area where we believe long-term investors like GIC can plug a financing gap effectively. While the companies in this segment hold long-term promise, they often find themselves caught between traditional buckets of capital. These investments would not meet the return hurdle of venture capital, and at the same time, lack the track record to attract infrastructure finance. Our investment programme for green assets builds on the track record, sector knowledge, and partnerships of SSG, allowing us to invest in the creation of new assets and harvest return premium by leaning in early.

Our country business groups that span different asset classes are another way for our teams to collaborate. Our India Business Group, for example, has unique insights that help various asset classes understand India’s developments more holistically, actively engaging local stakeholders and partners with deep expertise in India to glean more insights into the country. As India continues to grow in prominence in the world’s economy and capital markets, having such information and analysis positively impact the way we invest in the country. Bringing our various India-focused practitioners together also enables us to be flexible across the capital structure as and when opportunities arise.

On secular themes, we have cross-country and asset class groups like the Technology Business Group, focused on developments such as the disruptive potential of AI on business models in public and private markets. With the technology evolving rapidly and multiple countries and companies dedicating considerable resources to furthering their capabilities, the Technology Business Group drives coordination across investment teams to ensure we are on top of new developments.

To close the gaps between asset classes and keep up with new markets, we established the Integrated Strategies Group (ISG) over 10 years ago, investing in both public and private markets as well as across the capital structure, while developing thematic investment strategies. ISG seeks to capture opportunities that might not fall neatly within the mandate of other investment teams that are focused on a single asset class, and collaborates actively both with internal teams and external partners on deal sourcing. For example, the group works closely with family offices, family-owned businesses, entrepreneurs, corporates, and individuals with specific expertise to invest in leading companies globally.

Team-level Actions

To mitigate the risks of higher interest rates and an increasingly uncertain investment environment, our private market teams have further raised the bar for new investments. This is so that we can be more confident that the investment returns generated will be high enough to compensate for increased risks. For example, the higher rates environment will affect the future returns of our private market deals in two ways. It will increase our internal cost of funding, and it will put additional pressure on the portfolio companies and assets when they need to borrow new funds or refinance existing debt.

To mitigate the risks of higher interest rates and an increasingly uncertain investment environment, our private market teams have further raised the bar for new investments. This is so that we can be more confident that the investment returns generated will be high enough to compensate for increased risks. For example, the higher rates environment will affect the future returns of our private market deals in two ways. It will increase our internal cost of funding, and it will put additional pressure on the portfolio companies and assets when they need to borrow new funds or refinance existing debt.

Continued and accelerating advances in technology, including AI, have the potential to not just transform return opportunities but the way we invest. Within our Portfolio Execution Group, we have already integrated technology professionals into both investment and operational teams for nearly 10 years. Generative AI is now used to produce first drafts of investment reports for portfolio managers, drawing on various sources including credit ratings and Environmental, Social, and Governance (ESG) reports. Within our Public Equities department, technology is used to interpret information from annual reports, management call transcripts, and other relevant data.

Preparing for the Future by Strengthening Our Edge as a Long-term Investor

With the investment environment becoming more challenging, we must remain guided by our core investing principles of playing to our strengths as a global, long-term investor. By unearthing more granular opportunities with good risk-reward, continuing to emphasise collaboration and using more technology, we strive to continue to generate good real returns to safeguard Singapore’s financial future.

  1. 1

    Excess return is defined as the total return for either equities or bonds, excess of cash return. Cumulative excess return is the product of monthly excess returns with an expanding window.

  2. 3

    International Energy Agency (2023), Net Zero Roadmap (2023 Update)