Singapore investment company Temasek’s global direct investments saw a reversal of gains from the high valuations in the last two years, particularly in the technology, healthcare, and payments space, as valuations de-rated in the higher interest rate environment.
Temasek reported a Net Portfolio Value (NPV) of S$382 billion and a net cash position for the financial year ended March 31, 2023, a 5.2% fall from the record S$403 billion a year ago. NPV was 1.8 times the value of its portfolio a decade ago.
Its one-year Singapore dollar Total Shareholder Return (TSR) was -5.07%. Its Singapore portfolio companies remained resilient despite the drawdowns in the global markets and the challenging macro environment.
Similarly to what the investment company is facing, retail investors are feeling pressures from the high-interest rates environment which is eating into their earnings, as well as uncertainty over their investments due to the uncertain economic backdrop.
DollarsAndSense attended Temasek’s annual media briefing to unpack five takeaways from its FY2023 performance and how we can apply the learnings to our own investment portfolios.
#1 Slow Down In Investment Appetite, Adopt A Cautious Approach Amid Global Uncertainties
Temasek slowed down its investment pace as it adopted a cautious approach amidst global uncertainties. It also saw deal activity ease globally as liquidity tightened.
In the past year, Temasek encountered persistent inflation despite multiple rate hikes by central banks. Intensifying geopolitical tensions on several fronts such as US-China tensions and the Russia-Ukraine war, alongside rising nationalism and protectionism, have led to a marked shift from globalisation that has been the mainstay of global growth for the past 20 years.
The confluence of these events, not seen in decades, has raised the cost of capital and weighed on capital flows. It also had an impact on the pace of energy transition, in the face of greater demand for energy security and resilience.
During the year, Temasek invested S$31 billion and divested S$27 billion, resulting in a net investment of S$4 billion.
Over the decade, it has invested S$326 billion and divested S$248 billion. It continues to invest in opportunities that are aligned with long term structural trends and engaged its large Singapore portfolio companies to seek out opportunities of the future.
Temasek also reduced certain positions in the rebalancing of its portfolio, including where it sees long term structural risks, in ensuring that it can continue to maintain the strength of its balance sheet in the pursuit of a resilient and forward-looking portfolio.
Its portfolio remains anchored in Asia (63%). Singapore (28%), China (22%) and the Americas (21%) continues to be its three largest markets by underlying exposure. Its underlying exposure to developed economies, including Singapore, North America, Europe, and Australia & New Zealand was 64%, compared to 58% in 2013.
Overall, Temasek’s portfolio sustained its recovery from the lows during the Covid-19 pandemic, with a three-year TSR of 8%.
#2 Manage A Prudent Balance Sheet, Even In Times Of Stress
Temasek manages its leverage, liquidity, and balance sheet prudently for resilience and flexibility, even in times of stress. For the year ended March 31, 2023, its interest expense was about 5% of its dividend income of S$11 billion.
Temasek had S$22 billion of debt outstanding as of March 31, 2023, representing 6% of its NPV and 21% of its liquid assets.
Its early stage investments are at a small percentage of 6% of its portfolio. Such investments are aimed at fostering innovation to allow Temasek to keep a close eye on emerging technology and business models. The cap of 6% is part of its risk management framework.
It also only invests small amounts for initial investments, with a view to increase its stake if the company of choice demonstrates successful de-risking. Over time, early stage companies may mature into successful growth stage entities and generate attractive returns for the portfolio, but this is never a guaranteed outcome so portioning out only a small amount of investment from the portfolio lowers the risks.
#3 Focus On The Long Term; Anticipate Not Just The Road In Front Of You, But Also What Lies Around The Corner
Temasek’s TSR since inception in 1974 remained a robust 14%, while its 20-year and 10-year TSRs were 9% and 6%, respectively.
In 2019, Temasek developed its T2030 strategy – a 10-year roadmap to guide its strategic planning, capability building, and institutional development initiatives. It guides Temasek toward achieving its objective of sustainable value over the long term.
Temasek’s T2030 strategy consists of four pillars:
– Constructing a resilient and forward-looking portfolio that can withstand exogeneous shocks and perform through market cycles
– Embedding sustainability at the core of all that it does, from the way it invests, to how it operates as an institution
– Building up future-centric capabilities (in its Temasek Operating System) to benefit its ecosystem and the marketplace
– Developing its organisation and team with the right structure and capabilities to tackle the challenges of tomorrow, all in the pursuit of delivering sustainable value over the long term
#4 Have A Strong Liquidity Position To Stand Ready To Step Up In Investments In A Market Correction
As Mr Rohit Sipahimalani, Temasek’s Chief Investment Officer said at the FY2023 briefing, Temasek maintains a cautious investment stance and expects to invest at a moderated pace this financial year, given the challenging macroeconomic environment. However, given its strong liquidity position, it is ready to step up in investments in a market correction.
In the near term, Singapore faces slowing global growth and elevated inflation against a challenging macro backdrop. While China’s reopening could provide some support, the Singapore economy is geared more towards domestic demand in developed markets, which could experience a recession.
Adding to the complexity, geopolitical tensions have risen, although Singapore could stand to benefit from diversification of supply chains around the region, both in the near and medium term.
There is hence the need to stay focused on investing in opportunities that align with long term structural trends, so as to build a resilient and forward-looking portfolio.
In that similar vein, Temasek had also highlighted its plans to open a new office in Paris to expand its global footprint in geographies where it sees the opportunity to allocate significant capital for growth. The new Paris office will complement its London and Brussels offices to strengthen Temasek’s global network and grow the talent pool across both Europe and in particular, the European Union, as well as extend its reach to the Middle East, and Africa regions.
#5 Participate In Efforts To Build A Better, More Inclusive, And Sustainable World
There is a strong emphasis on sustainability from Temasek in this year’s review – from its mandate to deliver sustainable value over the long term, to its strategy of how it operates as an institution, shapes its portfolio, and engages portfolio companies to build sustainable businesses.
The long tail effects of climate change do impact the resilience and commercial viability of businesses as well as Temasek’s portfolio and there is a need to take urgent and sustained action against the climate crisis, reverse nature loss, and build a more inclusive and equitable society.
Temasek continues to keep to its commitment to carbon neutrality and efforts to reduce the environmental impact of its operations. Its resolve to accelerate decarbonisation globally continues as it progresses to achieve the target of reducing the net carbon emissions attributable to its portfolio to half of the 2010 levels by 2030 (and its ambition to reach net zero by 2050).
Featured Image Credit: Temasek Review 2023/ Angela Teng, DollarsAndSense
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