Singapore's Wealth Fund Warns Markets Face Future of Low Returns

(Bloomberg) -- Singapore's sovereign wealth fund GIC Pte expects the U.S.-China trade war, Brexit and over-hyped valuations in developed markets to weigh on returns in coming years.

GIC, which released its annual report Wednesday, generated an annualized real rate of return of 3.4% for the 20 years ending March 31. That's the same as last year and the lowest level since the global financial crisis roiled markets in 2008. GIC will only say its assets under management are above $100 billion but it's estimated to oversee about $390 billion, making it one of the world's largest such funds.

While GIC has warned of long-term negative trends for several years, these past 12 months have seen the rising use of trade tariffs as a political weapon, as well as other economic hurdles. That's prompted the fund to cut the percentage of money it invests in developed-market equities while ramping up investments in bonds and cash.

“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-globalization and resulting in companies needing to change the way they operate,” GIC Chief Executive Officer Lim Chow Kiat told Bloomberg News. “Partly because of that, we've turned more defensive.”

Silver Linings

The wealth fund has reduced its allocation to developed-market equities to 19% as of March 31 from 27% of its assets in 2017. Holdings in nominal bonds and cash -- a relatively safe but low-yielding asset class -- have grown to 39% from 35% over the same period.

GIC's rolling 20-year real return has been below 4% over the last three years essentially because the period excludes the high returns of the late 90s tech bubble, it said. That period includes the subsequent market decline.

Lim said the chances of a no-deal Brexit -- where the U.K. would leave the EU without striking crucial trade agreements -- had risen over the past two months, causing concern. But while such a process would likely hurt the economy, GIC sees a silver lining. About 6% of the fund's allocation is in the U.K. while 12% is in the Eurozone.

“Even with Brexit, we expect them to remain an open system and we expect the country to be still pro-business and pro-market and we don't think those high-quality universities are going away so they still have many, many positives,” he said.

Group Chief Investment Officer Jeffrey Jaensubhakij said GIC was evaluating the potential effect of the trade war every time it considers an investment. This has helped boost the case for some of its most recent transactions, such as the $6.3 billion deal it announced earlier this week to purchase railway-line operator Genesee & Wyoming Inc.

Data Centers, Property

“It's not that when we went in we really anticipated the worst in terms of trade, but it is one of those things where you say ‘what could be relatively protected in this time',” Jaensubhakij said.

Investment themes that GIC said could survive trade-war pressures include data centers, as well as the commercial property market in China. GIC announced Monday that it has signed a partnership with Equinix Inc. to develop and operate data centers in Europe.

Jaensubhakij added that China's healthcare sector was also likely to grow thanks to an aging population and the need to develop local treatments for illnesses like cancer.

“Areas where you can see long-term growth, where even if there is a down cycle you're likely to recover to a growing trend, are probably the things we'd be still willing to underwrite,” he said.

--With assistance from Joyce Koh.

To contact the reporter on this story: David Ramli in Singapore at dramli1@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net, Candice Zachariahs

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