Temasek Holdings expects slower growth and increased volatility in the year ahead, and continues to be cautiously confident about growth in the United States and China.
The Singapore government-owned investment firm estimates a five-in-six chance that its one-year portfolio returns will range from -21 per cent to 32 per cent for the period ending March 2017. Compared to the 10-year average range of -19 per cent to 33 per cent, this is more biased towards the negative, implying slower expected growth, and just slightly wider, implying higher expected volatility.
"Overall, uncertainty has increased, partly reflecting the ongoing hangover from the excesses that helped create the global financial crisis," Temasek head of strategy Michael Buchanan said at a press briefing. "And so, we see an environment of generally lower returns in the years ahead."
In terms of the United States, Mr Buchanan expects the economic recovery to continue, albeit at a modest pace. However, valuations have also risen. Although "super low interest rates" make those valuations palatable for now, rising business costs could put pressure on valuations and margins down the road.
"We have to be disciplined and selective about the opportunities we pursue," he said, adding that US Federal Reserve policy is expected to remain accommodative.
"The Fed is likely to continue to see the risk of tightening too soon as greater than the risk of tightening too late," he said.
On China, Mr Buchanan took the view that China will be able to transition into a more sustainable growth path in the medium term. Effective rebalancing will hinge on timely implementation of the government's own reform agenda, he said.
Debt is a serious challenge that China needs to address, however. Mr Buchanan said the sharp rise in corporate debt is unusually high given China's stage of development.
"These challenges are significant and the future path may be bumpy, but we see that for now China still has sufficient tools and fire-power to tackle these issues," he said.
Europe faces fundamental downside risks. European banks remain under pressure from negative interest rates, regulatory uncertainty and, in some areas, non-performing loans.
Britain's potential exit from the European Union, or "Brexit", should be viewed in the greater context of "euroscepticism", in which the very structure and future of European integration is questioned.
"Anytime you have this type of political uncertainty, it's going to weigh on confidence, both business confidence, and hence capex, and consumer confidence," Mr Buchanan said. "And we're already seeing that in the run-up to the referendum, where you saw a decline in PMI and other measures of confidence. And so that is likely to continue and will play on growth. In terms of the spillovers and so on to Europe, I would put Brexit as one example of the euroscepticism that is playing out in different ways."
As for Singapore, Mr Buchanan was upbeat about ongoing economic reforms.
"The efforts on domestic restructuring should help to unlock stronger productivity growth in the medium term," he said. "Singapore's openness means continued exposure to both mature economies and new regions and businesses, which will provide opportunities for growth in the future."
There are two key shifts in the economy that will drive investment themes. The first is a convergence of traditional sectors, which will give rise to emerging champions and disruptive business models, Mr Buchanan said. Temasek is looking into big data, robotics and artificial intelligence.
There is also a trend towards sustainable development amid growing consciousness about related issues among middle-income consumers and investors.
This article was first published on July 08, 2016.
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