The risk of a U.S. recession is rising, as is the risk that trade tensions will escalate into a full-blown trade war, Singapore state-owned investment company Temasek said at its earnings briefing on Tuesday.
Michael Buchanan, head of strategy and senior managing director for the portfolio strategy and risk group, said at the briefing that both risks are becoming a focus for the wealth fund, which on Tuesday reported its net portfolio value grew to S$308 billion for the financial year ended 31 March, up S$33 billion on-year.
“Over the last few years, we’ve actually pushed back on the notion that the U.S. was about to have a recession,” based on the length of the economic recovery, he said.
Previously, the U.S. economy had spare capacity in the form of idle workers who could re-enter the labor force, which would help the U.S. economy continue to grow without stoking inflation and forcing the U.S. Federal Reserve to hike interest rates, he said.
Now, he said, those workers aren’t sitting on the sidelines.
Indeed, currently there are more job openings in the U.S. than there are unemployed workers.
“So there isn’t that spare capacity so that’s now why we’re saying the risk of U.S. recession has gone up,” he said.
Trade tensions aren’t ‘costless’
Buchanan said Temasek’s base-line expectation was for continued trade tensions.
“We don’t expect a full blown trade war with punitive tariffs on a wide range of goods and a wide range of countries,” he said, adding, however, that it was a risk.
“Our expectation is not that we enter into a full-blown global trade war, but rather that we stay in this period where we have significant trade tensions,” he said. “Of course, that has an impact itself. If you stay in this period of higher trade tension, of course that’s going to have an impact on corporate investment and confidence. So, it’s not as though it’s a costless thing.”
However,Temasek noted that the trade tensions may not impact its portfolio overly much, if they don’t escalate.
For one, it was set to impact companies that do a lot of cross-border trade, especially those that have intermediate goods going back and forth across borders multiple times during the production process, Buchanan said. That would likely include the automotive industry.
Temasek hasn’t invested in those sectors, he said.
Is Temasek’s portfolio insulated?
However, Buchanan noted that while so far, the impact from the existing tariffs on growth and earnings has been relatively small, some specific companies will take a hit, and prices of some specific items, such as U.S. soybeans, would be affected.
Within the Asian region, in a “nastier trade scenario,” supply chains would likely be disrupted, but that may also spur companies to diversify geographically, with production in more than one location, he said, adding that Vietnam and Thailand could benefit in that scenario.
But Temasek expected the direct impact on its portfolio from trade tariffs would be limited.
“If there’s an overall trade war that slows down global growth, that is going to have the biggest impact on our portfolio, rather than directly from these trade tariffs,” Rohit Sipahimalani, joint head of the portfolio strategy and risk group at Temasek, said at the briefing.
“If you look in Asia, which is the largest part of our portfolio, a lot of our dedicated emerging markets out here, the primary theme we are focused on is rising affluence in emerging markets,” Sipahimalani said. “And most of that is really domestic based companies so the direct impact of the tariff is actually not there.”
Clarificiation: This article has been updated to refer to Temasek as a state-owned investment company.