Temasek says structural demand and geopolitical risk impacting China

Singapore’s state investor Temasek has a cautious outlook on China, despite having 19 per cent of its $389 billion portfolio invested in the country.

Temasek has been one of the big beneficiaries of China’s growth. But in recent years its allocation has struggled and underperformance in the country’s capital markets has dragged on overall performance in the portfolio, the value of which rose just 2 per cent on the year to March.

Speaking during the investors 2024 Review, the investment team said that despite a pro-growth stance from Chinese policy makers and an encouraging approach to foreign investment, structural demand challenges in China’s economy continue to weigh.

“We need to see a little bit more progress on that front before we can invest at a much faster pace,” said Chia Song Hwee, deputy chief executive officer.

Rather than companies focused on export that might be impacted by geopolitical risk, sectors of interest include Chinese companies that are tapping into domestic consumption. Other  examples include biotech, import substitution, robotics and the EV value chain.

While enthusiasm for China remains muted, Temasek will allocate more capital to developed markets like the US in the next 12-18 months.

The team did not give an exact breakdown of exposure to US assets but the Americas region constitutes 22 per cent of its portfolio. The US will continue to be the largest destination of capital outside Singapore, but Temasek will also increase its focus on India, Japan and south-east Asia, markets that have benefited as global investors seek to cut their exposure to China as growth slows and geopolitical tensions rise.

The size of the portfolio makes being nimble challenging. The team said that when they try to adjust the portfolio, the results aren’t immediately visible. “When we say “turn”, it will actually take quite a bit of time for us to make that shift,” said chief financial officer Png Chin Yee.

Temasek’s allocation to private assets is now over half the portfolio (52 per cent), up from 20 per cent in 2004.  The shift is a consequence of easier market access to unlisted assets and the ability to work with private companies, rather than a specific target to unlisted assets. Investment is made according to returns objectives and the opportunity in key themes. The increased exposure means the investor now reports unlisted assets at mark to market value, more in line with our peers.

Risk in real estate

Temasek has invested most in the credit side of real estate where it has found the best risk-adjusted returns that include a significant amount of downside protection through equity subordination. Assets include multifamily, other forms of living, data centres, logistics and hospitality.

The team said that data centres and logistics are still benefiting from secular tailwinds but warned that energy consumption in data centres is an increasing risk.

Owners are under pressure to integrate newer technologies and switch to more renewable sources. Temasek’s portfolio companies include  STT, Singtel, and Keppel and the team said the hype around data centres, along with AI and private credit, were front of mind.

“We have to have the discipline on valuing the opportunity and taking the appropriate risk measures when we invest, or not,” said Chai Song Hwee

Strength in partnership

Temasek is a renown early stage investor, but it is prepared to stay invested once companies go public to tap future appreciation. A good example is Adyen, the payments company, which Temasek invested in back in 2014 and still holds since it went public in 2018.

Partnerships in green investments include its stake in Pentagreen, a sustainable infrastructure debt financing platform set up with HSBC that focuses on lending to companies that struggle to tap traditional finance.

Temasek has also been active with the Monetary Authority of Singapore. Under the FAST-P initiative, Financing Asia’s Transition Partnership, a blended finance approach seeks to combine the private and public sector as well as philanthropy to catalyse financing for sustainable and transition finance in the region.