The global economy is in a fragile state, and economies like Singapore might slow down, warns state-owned investor Temasek Holdings.
Considering the reasonable likelihood of a recession in developed markets over the next year, Temasek’s chief investment officer Rohit Sipahimalani says it will maintain a cautious stance.
A tight labour market and inflationary pressures weigh on the US market, raising the risks of a 2023 recession, says Temasek. China, too, may face challenges achieving its 2022 GDP growth target of 5.5%, it adds.
The warnings hang over a rosy set of FY2022 results unveiled on July 12. For the fiscal year ended March 31, Temasek reported a net portfolio value of $403 billion, the first time the figure has crossed the $400 billion mark.
This was up $22 billion, or 5.77% y-o-y, compared to $381 billion last year.
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Temasek recorded a net profit of $10.6 billion for the year, moderating from $56.5 billion reported in FY2021, as it booked mark-to-market losses.
As an indication of how volatile these mark-to-market changes can be, Temasek’s net profit for FY2020 was $8.8 billion.
Over FY2022, Temasek invested $61 billion and divested $37 billion, marking the highest amount invested in 20 years and the second-largest amount divested in the same amount of time.
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Temasek’s one-year total shareholder return (TSR) was 5.81%, while TSR since its inception in 1974 was an annualised 14% over 48 years. Its 20-year and 10-year TSRs were 8% and 7% respectively, compounded annually.
The headline figures may have bested Temasek’s historical records, but perhaps most striking is the growth in its unlisted assets, which now make up 52% of its portfolio in FY2022, up from 45% the previous year.
The value of these unlisted assets, meanwhile, swelled four times to $210 billion from $53 billion a decade ago.
‘Good opportunities, listed or unlisted’
The unlisted assets have an internal rate of return (IRR) of 16.2% over a 20-year period, dwarfing the corresponding 6.7% from listed assets. Together, listed and unlisted assets made for an average IRR of 9.4% since 2002.
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Temasek invests in “good opportunities, regardless of whether they are listed or unlisted”, says Temasek’s joint head, enterprise development group (Singapore) and head for strategic development Russell Tham, adding that from a mark-to-market view, “this unlisted portfolio value will rise another 10%”.
Of the total unlisted portion, Singaporean companies like Mapletree, grid operator SP Group and port operator PSA made up the lion’s share of Temasek’s unlisted assets, at 36%. Such entities deliver steady dividends and help beef up overall liquidity.
Meanwhile, early-stage companies and other private companies made up 26% of Temasek’s unlisted portfolio. Its asset management businesses contributed 20%, while private equity and credit funds made up 18% of Temasek’s unlisted portfolio.
Compared to listed names, these unlisted assets are less risky, claims Sipahimalani. “It’s lower risk because we can [do our due] diligence [on] these companies much better. We have access to much better information [and] we can actually have a role in the governance of these companies. We are more than compensated for the illiquidity premium based on the returns we’ve seen on this portfolio.”
Could this be Temasek’s new direction amid increasing choppy global markets? This could depend on how trends play out, says Lim Ming Pey, managing director for Temasek’s strategy office and deputy head for organisation and people.
“We always approach investments from a bottom-up perspective,” she continues. “So actually, that percentage of unlisted assets becomes a resultant number as we move towards trends; they manifest themselves in certain parts of this segment.”
“I think this is worth emphasising: We don’t have a private asset allocation goal. Each segment of unlisted asset portfolios serves a different purpose and gives us different value. They’re not in and of itself because they’re private. I think it’s really looking at the dividends that they may give us,” adds Lim.
For FY2022, Temasek’s interest expense was about 5% of its dividend income of $9 billion. Temasek’s total debt was about 5% of net portfolio value (NPV), in line with the past two years. Temasek says its portfolio remains liquid, with total debt at about 13% of listed holdings and about 19% of its liquid assets.
Tech sector correction
Despite a drop from 24% in FY2021 to 23% for FY2022, Temasek’s investments in financial services still make up the largest industry sector within the overall portfolio.
Key investments include DBS Group Holdings and Standard Chartered Bank. On the other hand, investments in telecommunications, media and technology (TMT) dropped from 21% in FY2021 to 18% in FY2022.
This is the largest sector drop in Temasek’s portfolio, which can be attributed to the correction of the tech sector.
Temasek International’s head for the US West Coast and deputy head for technology and consumer Martin Fichtner says that despite the decline, TMT remains a “core” sector, adding: “Digitisation is not just a technology element; it’s something that touches the economy in general.”
Furthermore, Temasek’s investments in technology and technology-enabled business models may show up in other sections of the portfolio.
For example, a company that uses technology to provide financial services will reside in the portfolio’s financial services portion instead.
“It really depends where the company’s core business and core focuses are, and our thesis for that company,” says Fichtner.
Temasek expects to see a lot of this “convergence” in the companies they invest in moving forward, says Lim. “So, something like digitisation that pervades all our trends — is it really just technology? What Temasek is doing is to encourage its own teams to think cross-functionally, and really work towards those converging opportunities, where we see a lot of value.”
Exposure to transportation and industrials also increased from 19% to 22% in FY2022, partly because of the additional funds committed to the rescue of Singapore Airlines (SIA).
The national carrier conducted a $6.2 billion rights issue in June 2021 in the form of mandatory convertible bonds (MCBs), which went undersubscribed.
SIA received just $3.76 billion worth of applications, representing just 60.6% of the $6.2 billion available. Out of the $3.76 billion, $3.43 billion was taken up by Temasek and its wholly-owned subsidiary Napier Investments.
The balance of $2.44 billion was taken up by Temasek.
Anchored in Asia
Across countries, Singapore and China continue to be Temasek’s two largest countries by exposure. Singapore overtook China in FY2022 to be the single largest market with an exposure of 27% from 24% in FY2021.
The proportion from China, on the other hand, dropped to 22% from 27% in the same period.
Temasek’s notable investments in China include stakes in Alibaba Group, which has suffered from China’s crackdown on tech companies, and the Industrial and Commercial Bank of China.
Temasek remains upbeat on China. “We’ve been there for almost 20 years and we’ve seen many cycles. Over the past decade, I would say it has been the best-performing market for us, even including last year,” says Sipahimalani.
The change in the portfolio weightage, he explains, was entirely due to market price movements. “In fact, we were a net investor in China last year … We have seen attractive opportunities in this volatile environment to invest in China.”
The Singapore portfolio, on the other hand, was lifted by the performance of the various key index heavyweights such as DBS Group Holdings, which was up 29% for the year to March 31, and Singapore Telecommunications (Singtel), up 11%.
Temasek has shown a tendency to be more actively involved in its portfolio companies, notably, the on-going merger bid between Keppel Corp’s offshore unit and Sembcorp Marine (SMM).
With Temasek as a shareholder in both entities, Tham calls the deal a “compelling proposition”.
Last year, when Temasek invested $1.5 billion to take up an additional stake in SMM, it was part of an overall plan for the company to transform and move forward.
“It was stated then that this includes the proposed merger with Keppel O&M that was designed to help them pivot into better opportunities within the clean, renewable space,” says Tham.
Is Temasek worried that the deal will not go through? The Edge Singapore reported in June that some analysts believe the merger unfairly favours Keppel over SMM. One of Sembcorp Marine’s largest shareholders even started a website to oppose the deal.
Refusing to speculate on “hypothetical scenarios”, Tham says that SMM’s management has “indicated its liquidity position will be good until at least the end of 2023 as a standalone entity”.
Sipahimalani also believes that a combined entity will be more capable in competing globally and managing the green transition. “I think the important thing is that both management needs to get both companies to clearly articulate the benefits they see in the merger.”
Key investment pillars
Temasek sees three engines of growth for its portfolio in 2030.
First, a so-called “investment engine” will work to deliver sustainable returns over the long-term through the construction of a resilient and forward-looking portfolio.
Next, the “partnership engine” will scale capital through strategic partnerships, and the “development engine” will build future growth sectors and nurture leading enterprises.
Finally, its “development engine” helps to generate novel solutions with potential to scale and commercialise, through funding pilots, feasibility studies and research programmes. It has also invested into opportunities in the sectors of AI and digitisation, blockchain, cybersecurity and sustainability solutions.
Tham says Temasek plays its part as a “builder for growth”, and says that these investments help it gain a deeper understanding into emerging technology and business models, as well as see the potential implications of threats and opportunities on its broader portfolio.
“Armed with these insights, we can construct a more resilient and future-ready portfolio to further add value to the Temasek ecosystem and beyond,” he adds.
Infographics: Temasek
