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GIC More Positive On Emerging Markets On Growth Prospects
Perspective | 07 August 2014

GIC, manager of more than US$100 billion of Singapore’s reserves, said it’s more positive on emerging markets, citing growing middle classes, valuations and the progress of reforms.

Emerging markets “of course have their own challenges, but we find that the valuation is not the hurdle,” Lim Chow Kiat, the sovereign wealth fund’s chief investment officer, said in an interview as GIC released its annual report on 2 August and warned about elevated prices in developed markets. “We are not starting with high-asset prices.”

The state fund favours countries including China, India, Indonesia and Mexico, Lim said, declining to elaborate on specific holdings. GIC’s 20-year annualised real rate of return, or increases on top of global inflation it uses as its main metric, was 4.1 percent as of 31 March, compared with 4 percent the previous year, the fund said in the annual report.

GIC is increasing its investments in emerging economies as growth rates are expected to outpace those of developed markets. Expansion in developing nations is projected to be 4.6 percent this year, compared with an outlook of 1.8 percent for mature markets, the International Monetary Fund said in July.

‘More Cautious’
The MSCI Emerging Markets Index declined 3.9 percent in the year to March, while the MSCI World Index, which tracks stocks in 23 developed countries, gained 17 percent, the most in four years, as central banks worldwide kept interest rates low to fuel growth.

The measure tracking emerging economies trades at 13 times reported earnings, compared with the developed-market gauge’s multiple of 18, according to data compiled by Bloomberg.

“We are seeing overvaluations in parts of the developed world, especially in the equity markets in Europe and the US,” said Khiem Do, the Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management. “In the emerging markets, we like bonds in Latin America.”

Asian stocks are cheap, apart from “glamorous” sectors like internet, consumer, and healthcare, Do said.

GIC’s holdings in developed-market equities declined to 29 percent from 36 percent, according to the statement. The drop is overstated due to a reclassification, the fund said.

Investments in emerging-market stocks increased to 19 percent from 17 percent, GIC said in the report. Nominal bonds and cash accounted for 31 percent, compared with 29 percent. The share of inflation-linked bonds increased to 5 percent from 2 percent. The share of real estate declined to 7 percent from 8 percent, the fund said. The allocation to private equity climbed to 9 percent from 8 percent.

China View
“Asset prices are high relative to the fundamentals; that means we need to be more cautious in terms of expecting future returns,” Lim said. “Many economies are still highly dependent on central bank policy. That presents another challenge for investors.”

China’s development remains “very important” in the world given the size of the economy, Lim said, adding that it will take a number of years to see significant results from reforms in the nation.

“We take a positive view about the reform efforts that the Chinese government is embarking on,” he said. “From what we can observe, we believe these are on track. It’s not going to be just a smooth thing you can do within one or two years.”

Chinese President Xi Jinping is overseeing the implementation of the broadest economic reforms in China since the 1990s, including opening state-owned enterprises to more competition and encouraging private investment.

Property Investments
Mexico is pushing through a raft of legislation, from opening the oil industry to more private investment to spurring competition in banking and telecommunications. India’s Prime Minister Narendra Modi, elected in May, has pledged to restore economic growth, contain inflation and fiscal consolidation as well as revive stalled projects to restore investor confidence.

GIC did several transactions in emerging markets over the last 12 months. It was among investors in India’s biggest online retailer,, which on 29 July said it raised US$1 billion. In Brazil, GIC agreed to invest in water and sewage treatment company Aegea Saneamento e Participacoes SA.

Emerging markets offer better opportunities for property investments, Lim said. Real estate was among GIC’s biggest transactions in the year ended March.

The state investor bought Blackstone Group’s 50 percent stake in London’s Broadgate office complex. It also teamed up with US property developer Related Cos and the Abu Dhabi Investment Authority to purchase the headquarters space at Time Warner in New York City’s Columbus Circle for US$1.3 billion.

Fifth Biggest
“It depends on whether we see if the prices are good,” Lim said. “The more common thread is emerging markets, where we tend to find real estate which is better priced outside of those developed countries.”

GIC is the world’s fifth-biggest state fund with estimated assets under management of US$315 billion, according to the website of the London-based Institutional Investor’s Sovereign Wealth Center. It almost exclusively invests outside the city-state and has a lower share of listed equities in its portfolio compared with Temasek Holdings, Singapore’s other state-owned investment company. Temasek, which is operated separately from GIC, last month reported a total shareholder return of 1.5 percent for the fiscal year ended 31 March, down from 8.9 percent in the previous period.

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