GIC CEO Lim Chow Kiat recently talked about three key challenges facing investors today and how GIC is adapting to these new realities. These are an edited transcript and recording of the keynote speech he delivered at the Global Asset Management Forum (GAMF) 2022 Shanghai Summit.
Good morning. I am honoured to have this opportunity to share some of GIC’s thoughts with you. While my comments are focused on the global environment, and not specifically on China, GIC takes a deep interest in the country given its importance. We have a long history of investing in China, including having offices in Beijing and Shanghai.
We see the investment world, like the larger world, in transition. In other words, we are in between moving from an old state to a new state.
In transition, we tend to experience high volatility and uncertainty. The past two years were a good example.
The Covid-19 pandemic, at the beginning, saw the largest and fastest contraction of global GDP. This was followed by an equally impressive recovery that was twice as fast as what we experienced following the Global Financial Crisis (GFC).
Financial markets mirrored that trajectory. The S&P 500 Index suffered a 31% drop within one month from mid-February 2020. But it recovered all the losses within six months, in contrast with seven years after the dot-com crash and six years after the GFC crisis.
The recovery was achieved by infusions of staggering amounts of monetary and fiscal stimulus. Interest rates were rapidly cut to zero while governments spent about 10% of GDP in stimulus. Central banks pumped US$10 trillion into the economy.
Public debt in developed markets ballooned to more than 120% of GDP – surpassed only by the post-WWII peak in 1946.
We are now paying the price. Global inflation has broken out of its 40-year downtrend. It will reach close to 8% this year – the fastest pace since 1981.
The removal of stimulus and the rise in interest rates this year have also been equally rapid. Global interest rates have more than doubled from record lows last year. Some of them are back to levels before the GFC. Quantitative easing has become quantitative tightening, and containing inflation may see more interest rate rises.
Most asset classes have seen negative returns. A balanced portfolio of 60% equities and 40% bonds has just experienced one of its largest drawdowns, falling 16% in the first six months of 2022. This is the lowest one percentile of six-month returns since 1971.