This article is republished from the chapter “Letter from the CEO” in the GIC Report FY2022/23. You may read the full report here.

The global investment environment continued to change in fundamental ways over the last year.

The Russian invasion of Ukraine has persisted, inflicting growing human and economic tolls. Together with highly expansionary macroeconomic policies in the major economies, the war also contributed to the jump in global inflation rates, ending a 40-year disinflationary trend. To rein in inflation, major central banks embarked on aggressive interest rate hikes. In the US, the energy transition saw a major boost following the passage of the Inflation Reduction Act. Since late 2022, generative artificial intelligence (AI) has caught on at an unprecedented speed and scale, with its wide-ranging but uncertain impact creating optimism or pessimism, depending on where you sit. In China, the surprise decision to end its strict Covid policy raised hopes for better global growth this year.

For investors, 2022 was also a watershed year. Global bonds fell by 16% 1 and equities by 18%2 in US$ terms, posing a challenge to portfolios which were relying on bonds to offset equity risk. The valuations of businesses with distant future cash flows were hit particularly hard. At the same time, financing conditions in capital markets tightened significantly, resulting in a steep drop in investment deal volume.

We are not out of the woods yet. The consequences of the policy tightening are still being felt in the economy and markets. Some banks face the prospect of low profitability due to higher funding costs and potential loan losses. Housing markets relying on floating rate mortgages are also experiencing refinancing pressures. At the same time, de-globalisation pressures continue to build up, fuelled by intensifying great power rivalries. In addition, climate risk continues to rise, manifesting in more natural climate disasters.

Despite these challenges, GIC’s long-term performance has remained resilient. As at 31 March 2023, for the 20-year period from 1 April 2003, the annualised US$ nominal return of our portfolio was 6.9%. Adjusting for global inflation, the annualised 20-year real return stood at 4.6%, a slight increase from last year’s 4.2%.

GIC’s expected long-term returns are used to calculate the annual Net Investment Returns Contribution (NIRC), which is derived from up to 50% of the investment returns from the Monetary Authority of Singapore (MAS), GIC, and Temasek Holdings. It is a significant contributor to the Singapore Government’s budget. For FY2023, the NIRC is an estimated S$23.48 billion.3

An era of continued uncertainty

In my letter last year, I highlighted the disruptions associated with persistent inflation and chronic geopolitical risks. They remain relevant today. In addition, there are two new disruptions to grapple with.

The first is a potential structural shift to a regime of higher interest rates. With last year’s quick succession of interest rate hikes and persistent inflation, we are likely to see interest rates being “higher for longer”. Absent another major shock to financial markets or economic growth, we have likely left behind us the world of zero interest rates. While the resulting higher prices of capital will benefit long-term investors, the transition to a higher interest rates world will be difficult for many businesses and even countries. Those with business models reliant on very low interest rates will need to make significant, and sometimes painful, adjustments. Even their viability may be in doubt.

The second is the impact of generative AI. While AI has been around for years, the recent advent of generative AI, including large language models, raises great promise as well as hazards. Many real-world use cases are appearing, and multiple variants of open-source AI models are being released at a rapid pace. Financial markets are digesting the news, with more assets being repriced. While technology companies are the current focus, all businesses will soon need to adapt. AI has the potential for creative destruction and could also deliver productivity improvements that help keep inflation in check. It also naturally brings with it worries of threats to cyber security and societal norms. Naturally, governments are taking a deep interest in this development.

Investing through disruptions

To navigate these disruptions, GIC is guided by our core investment principles of taking a long view, diversifying our exposures and, importantly, preparing instead of predicting. In this era of continued uncertainty, making our portfolio more resilient is a key focus. We will continue to seek out investment opportunities with stable long-term returns.

Building a resilient portfolio

This era of high uncertainty started several years ago. In particular, investors have been concerned with the prospects of poor average returns and a wide range of likely returns even over the long term.  Consequently, GIC embarked on an effort to strengthen our portfolio resilience. We began to integrate market (beta) with active (alpha) returns, and to take a more granular approach in adjusting our exposures.

A specific portfolio action was to raise the liquidity of our portfolio. While valuations have corrected to some degree in the past year, we remain cautious. We have also been emphasising stable income-generating assets that protect our portfolio against inflation. Finally, in response to shifts in supply chains, we have incrementally moved our capital to sectors and countries benefiting from these shifts.

Infrastructure assets

GIC has been building up our infrastructure assets as part of a long-term effort towards resilient returns. In this report, we dedicate a feature article to the unique proposition that infrastructure assets offer to the GIC Portfolio. The article explains the risk and return characteristics of these assets, as well as our investment process.

Sustainability efforts

We have also made further progress in integrating sustainability into our investment and corporate processes. Last year, we established a central Sustainability Office to raise our research and policy capabilities, and to support our investment teams in their decarbonisation trajectories. As a long-term investor, we see promising opportunities in the green transition, which we are seizing through focused teams across asset classes. In the Public Equities Department, we set up the Climate Change Opportunities Portfolio to deploy more capital towards climate mitigation and adaptation; in the Private Equity Department, we created the Sustainability Solutions Group to invest in early-stage energy transition opportunities; and in the Fixed Income and Multi Asset Department, a new Transition and Sustainable Finance Group was formed.

Strength in our people and partnerships

There have been a few leadership changes in GIC, at the Board level and in senior management.

Mr Tharman Shanmugaratnam, Deputy Chairman of GIC since 2019, resigned from the GIC Board on 7 July 2023. As Chairman of our Investment Strategies Committee since 2011, he has guided GIC through numerous international uncertainties and shifts in the economic landscape with a steady hand, sharp insights, and a steadfast commitment to long-term performance. Mr Lawrence Wong, Singapore’s Deputy Prime Minister and Minister for Finance, as well as a GIC Board director, was appointed Chairman of Investment Strategies Committee effective 7 July 2023.

This year, we appointed Mr Sam Kim as Deputy Chief Operating Officer and Mr Goh Chin Kiong as Deputy Chief Investment Officer for Real Estate. These appointments will strengthen our leadership bench.

GIC can only carry out our mission with the strong commitment and capabilities of our people. We continue to invest heavily in upskilling our teams and fostering greater diversity. We are now close to our target of having 30% of our senior leadership be women.

GIC benefits greatly from our extensive network of business partners. Through many one-to-one and group collaborations, including our flagship forums such as GIC Insights, Partnership Forum, and Bridge Forum, we create significant value for our portfolio and the investment community. GIC also works to serve local communities through programmes such as GIC Sparks & Smiles and GIC’s Learning Journey. Recently, we added a partnership with Ray of Hope to launch a donation matching platform for employees to support ground-up community groups and reach more disadvantaged communities.

Committed to our purpose

A world of disruptions holds many challenges but also opportunities for investors. GIC will continue to prepare for them, and stay anchored in our mandate, values, and investment principles. Most importantly, we will stay committed to our purpose of safeguarding Singapore’s financial future.