Investing in a Low-Return Environment
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The investment environment is expected to be more difficult over the next 10 to 20 years given historically low interest rates, current high asset valuations, and a modest yet uncertain growth outlook. With our robust approach to investment and risk management, cross-asset class expertise, strong reputation and global network, we are ready to face this difficult investment environment over the next 10 years and beyond. GIC accepts no liability whatsoever for your actions or the actions of third parties in relation to your use of or re-distribution of these slides. Images herein may depict objects or elements that are protected by third-party copyright, trademarks and other intellectual property rights. © GIC 2016. All rights reserved.
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Investing in a Low-Return Environment
- 1. Investing in a Low-Return Environment
- 2. The investment environment is expected to be more difficult over the next 10 to 20 years given historically low interest rates, current high asset valuations, and a modest yet uncertain growth outlook.
- 3. Global long-term inflation has fallen, while central banks have cut interest rates and injected money directly into their economies to boost money supply in the system. This was done to raise asset prices and boost spending due to the Global Financial Crisis from 2008 to 2009. All these helped drive down long-term interest rates to historic lows in many countries, even becoming negative in some markets. Given the weak economic outlook, interest rates are expected to stay at current levels, or rise slightly. Even small increases in interest rates will negatively impact asset prices, and reduce potential returns. Why are interest rates so low?
- 4. Asset prices have risen rapidly since 2009, given attractive initial valuations, low interest rates and abundant capital targeting investments. However, the outlook for economic growth and company earnings has not improved by as much. Current asset valuations are high relative to their fundamentals, indicating lower return expectations over the next 10 to 20 years. Why are valuations high?
- 5. Modest & Uncertain Outlook The outlook for asset returns also faces numerous uncertainties such as the China hard landing, Eurozone break-up, US recession, rising political tensions and geopolitical issues. In addition, should a global downturn occur, policymakers may run out of policy tools to sufficiently boost growth, leading to a slow and difficult recovery.
- 6. Given high asset prices, historically low interest rates, and the modest, uncertain global growth outlook, financial asset returns over the next 10 to 20 years are likely to be lower than history.
- 7. GIC is a disciplined long-term value investor. We invest where the current asset price is below its fair value. Such pricing discipline leads us to buy undervalued assets or move away from overvalued markets, even if it means going against market sentiments. This is crucial, especially in times of great uncertainty. How will GIC adapt to this environment of lower returns?
- 8. It is important to have a clear defensive strategy to reduce portfolio risk. This includes: Maintaining sufficient diversification in our portfolio to help protect the overall value of our investments. Assessing our exposure to assets that are more sensitive to broad market movements. Investing in defensive assets that tend to perform better in times of market downturns. Rebalancing our portfolio over time and making sure we do not invest too much or too little in any one year. Looking for opportunities to buy portfolio insurance where it makes financial sense. Watching our portfolio costs as such savings add directly to our overall return.
- 9. We continue to take advantage of our internal expertise and resources, local market presence and global network to find bottom-up opportunities that will deliver good risk-adjusted returns. How does GIC invest in this low-return environment?
- 10. Our allocation to emerging markets is expected to improve overall portfolio returns over the long term. These markets offer the strongest growth prospects, driven largely by their underlying trends of a rising middle class and growth in trade. We also continue to explore new industry trends, skill sets, asset strategies and portfolio approaches that can add to our returns. .
- 11. With our robust approach to investment and risk management, cross-asset class expertise, strong reputation and global network, we are ready to face this difficult investment environment over the next 10 years and beyond.