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Temasek’s approach to AI: Support portfolio companies create value

Generative AI offers compelling investment opportunities and will significantly impact productivity, changing and reshaping industries, as well as driving innovation. It will lead to an increase in investment activity as corporate boards urge management teams to invest in the technology, and has already helped push the S&P500 into a bull market, said Rohit Sipahimalani, CIO of Temasek.

From an investment perspective, the revenue‑generating opportunities of AI and today’s nascent business models are still unclear and Temasek remains “very cautious.”

However, as investment starts to flow into the infrastructure around AI, focus for the S$382 billion ($289 billion) Temasek is on supporting portfolio companies apply the technology to create value. The investor is focused on building capabilities to co‑innovate products and services with its portfolio companies, he said.

Reflecting on other opportunities in the current investment climate, Sipahimalani said Temasek would invest in companies which have strong pricing power. Wary of continued inflation and higher interest rates, he said, “we will increasingly favour companies that have strong cash flows compared to the past.”

The green transition will also be a key focus where opportunities will be fanned by encouraging fiscal policy like US policy IRA. In another approach, Temasek will look at opportunities through a geopolitical lens.

“We wouldn’t invest in areas that are in the cross hairs of US /China tensions,” he said. Similarly, in a fragmented world he said he preferred investing in companies that have access to large domestic markets.

Amid opportunities, Sipahimalani warned that the global economy remains fragile. Speaking as the investor reported a 5.07 per cent drop in total shareholder returns, its poorest annual performance since 2016, he warned that geopolitical tensions show no signs of easing.  Inflation remains elevated causing most central banks to maintain tight monetary policy and growth is also slowing with tighter credit conditions, pointing to recession in developed markets.

“I know we and everyone else has been saying this for a while now – it is the most anticipated recession which still has not happened. We do believe that to keep inflation under control, we probably will need to see a recession, although the timing for that is uncertain.”

In response to last year’s tough investment conditions Temasek slowed the pace of investment and divestment. Temasek invested S$31 billion and divested S$27 billion, resulting in a net investment of S$4 billion. This compares to a net investment of S$24 billion in the prior financial year.

Portfolio diversification

The portfolio is anchored in Asia, with almost two thirds invested in the region. Still, exposure outside of Asia into the Americas and Europe has more than doubled over the last decade with a focus on sectors including transportation and industrials and financial services. The portfolio has also been structured around key trends. Over the last decade the allocation to life sciences and agri-food sectors, for example, has grown from 1 per cent to 9 per cent. Since 2011, the returns of Temasek’s focus sectors have outperformed the overall portfolio by about 4 percentage points.

In 2016, Temasek identified structural trends to guide portfolio construction including digitisation and sustainable living, future of consumption and longer lifespans. Today  investments aligned to these trends account for 31 per cent of the portfolio.

Temasek’s investments in unlisted assets span different strategies. It invests directly into private companies, including early-stage companies. In another approach, investments in third-party funds enable Temasek to gain insights into new sub-sectors and markets, and also provide co-investment opportunities. Temasek also  mandates around S$80 billion to asset managers to invest in private markets, and over the last 20 years, returns in unlisted assets have outperformed listed returns.

The unlisted portfolio also provides liquidity through dividends, distributions, divestments and when companies list. For example, in the last five years holdings, such as Adyen, Meituan, and Roblox have been listed with significant value uplift.

Temasek values its unlisted investments at book value less impairment, but if it were to mark it to market, it would provide an uplift of about S$18 billion to the portfolio.

To manage the higher risks that come with early-stage companies, Temasek caps exposure to this segment to 6 per cent of the portfolio. Early-stage investments in the past include Meituan and Alibaba, both generating returns above industry averages.

outlook for china

Sipahimalani said that although the Chinese economy is coming into a cyclical recovery out of COVID, the pace of recovery is slower than expected. “China seems to be on track to achieve its 5 per cent GDP growth target for this year but could fall short of market expectations which are for higher growth.”

“Property sales have fallen, infrastructure spending has slowed, and exports growth have slowed,” he said. “The only engine we need to rely on to achieve the growth targets for this year is consumption, but the lack of job opportunities has been impacting consumer confidence and holding back spending.”

Expectations that the Chinese government will provide stimulus to step up growth like they have done in the past are high. But he predicted that any stimulus will be much lower, and much more modest, than what investors have seen historically.

Temasek is now looking to deploy more capital into south east Asia than it has in the past given the potential of the internet economy in the region, China + 1 and favourable demographics. One reason is the emergence of the Southeast Asia digital economy.  He said that security and resilience now takes precedence over globalisation, and de-risking, decoupling and fragmentation are the investor’s new watchwords.


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