How Temasek is girding its portfolio against the US-China trade war

Temasek fiscal 2019 performance overviewTemasek fiscal 2019 performance overview

Over the past year, Temasek’s portfolio has been buffeted by market ructions amid the U.S.-China trade war, spurring declines in U.S. dollar terms, but when it comes to its next steps, Singapore’s state-owned investment company said it’s largely staying the course.

In late June, the U.S. and China called a trade war cease-fire on tariffs at the G-20 meeting in Osaka, Japan, and they revived negotiations, but analysts don’t expect the hostilities to end anytime soon.

John Vaske, head of Americas at Temasek, said at a press conference Tuesday that the company was making “a pretty intensive effort” to understand the impact of the trade war and changing supply chains on its existing portfolio — in addition to how it’s deploying new capital.

One impact already appears to be slower portfolio growth.

Temasek reported Tuesday its net portfolio value rose to S$313 billion as of end-March, compared with fiscal 2018’s surge to a then-record high of S$308 billion. But it said its total shareholder return (TSR) was 1.49 percent in Singapore dollar terms for the fiscal year, while U.S. dollar TSR was a 1.93 percent contraction, Temasek said.

In last year’s review, Temasek reported the total shareholder return was 12.19 percent in Singapore dollar terms.

Despite the slower growth, Png Chin Yee, senior managing director for portfolio strategy and the risk group, said that Temasek’s portfolio was relatively insulated from first-round impacts of the trade war.

“Our investment strategy in these markets is very much focused on domestic needs,” including investments in financials, technology and consumer plays, Png said. “We’re looking for companies which will have strong secular, structural forces that underpin them despite whatever goes on around the world.”

That’s also true of Temasek’s investments in China, she noted. As China underwent a years-long structural transformation from an investment-led to a consumption-led economy, Temasek has shifted its investments there, she said.

“If you look where manufacturing has been, it’s been moving up the value chain. China is no longer the low-cost producer that it was in the past,” she said. “You see increasingly consumption and service business contributing more to china’s growth. If you look at our portfolio, that has also mirrored that transformation.”

She said Temasek’s investments on the mainland have shifted from bank plays toward insurance, consumer, technology and life sciences. Within the U.S., Temasek is also looking at plays on payments’ shift away from cash, she said.

Temasek also said its technology investments tend to focus on plays that aren’t dependent on the import and export chains, instead looking at new business models and consumer applications. Among its investments are digital services provider UST Global, online food delivery player DoorDash, Indian ride-hailing company OlaCabs and Brazilian healthcare e-commerce player Bionexo.

It has also taken a stake in AirMap, which operates an unmanned traffic management system for drones.

The company has also invested in co-working space provider WeWork China and Chinese cell therapy company Gracell Biotechnologies.

Png, however, expressed concerns about the U.S. Federal Reserve’s recent about-face toward a more dovish policy outlook. As the Fed loosens policy, yields and returns on a variety of assets are likely to fall.

“If the low inflation environment, the low interest-rate environment continues, then I think our expectation is that returns will be much more challenged going forward,” she said.

Dilhan Pillay Sandrasegara, Temasek’s executive director and CEO, expressed similar concerns, noting that valuations of assets are elevated, with the company facing a lot of competition.

“We have to be mindful of the fact that it’s going to be an expensive world out there and for the good quality assets, we have to find ways in which we can ensure we can get long-term value,” Sandrasegara said. He pointed toward increased interest in private equity and private capital investments.

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