The shift to a potentially high-inflation regime, for one, has “significant” investment implications.
“High inflation not only reduces real returns immediately, but its adverse impact on economic stability raises the risk premia on financial assets,” GIC pointed out in its report.
“Portfolio diversification will also be more challenging as few assets are spared from the effects of worsening inflation and slower economic growth.”
GIC’s group chief investment officer Jeffrey Jaensubhakij, who was also at the media briefing, laid out other headwinds.
In the near term, the world will have to contend with further monetary policy tightening by central banks to combat persistently high inflation, alongside supply disruptions and fading fiscal stimulus. Challenges over the longer run include high debt levels built up in the global economy, a slowdown of favourable demographics in countries like China, and waning globalisation.
Geopolitical shifts, such as a fractured global power structure and intensified rivalry between key economies, also contribute to an increasingly uncertain environment.
At the same time, key trends like the low-carbon transition and technological advancements, are two areas that will present both risks and opportunities. For example, the latter will continue to disrupt jobs and businesses, but it can also be a source of economic growth and investment opportunities.
“The environment is uncertain – it has been for a while but it’s not getting any better,” Mr Lim told reporters, while Dr Jaensubhakij noted that a landscape filled with headwinds means that its “portfolio will continue to be difficult to manage”.
Asked what this means for GIC’s future investment performance, Mr Lim noted that the sovereign wealth fund has for a number of years posited that returns going forward “will likely be low”.
“Unfortunately, until we have more of so-called restoration of value – whether it is bond yields, earnings yields or dividend yields – return prospects are still not great.”
DIVERSIFY PORTFOLIO, INVEST MORE IN INFLATION-RESILIENT ASSETS
Nonetheless, GIC said it will navigate these uncertainties by pressing on with a diversified portfolio, maintaining price discipline and exploring alternative strategies.
It is also preparing ahead of time by being “in companies or asset classes that can hold out better”, said Dr Jaensubhakij.
For one, the investor continues to deploy more money into real assets like real estate and infrastructure, which offer protection against inflation and have generally outperformed nominal bonds in a high-inflation environment.
It added that it has ramped up headcount in this area by more than 35 per cent over the last three years to bolster its investing capabilities.
In addition, the sovereign wealth fund raised its allocation to certain high-growth asset classes within equities, such as private equity, citing returns that can keep pace with elevated inflation.