GIC Sees Brighter Emerging-Market Outlook in Uncertain World

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  • India is in more positive position than many countries: CIO
  • China needs to implement more reforms, Group CIO Lim says

In an environment of diminishing returns, emerging economies are offering better opportunities for investors compared with last year, Singapore’s sovereign wealth fund GIC Pte said.

Several emerging nations have reigned in excessive credit growth, Lim Chow Kiat, GIC’s group chief investment officer and deputy group president, said in an interview. They are also seeing adjustments to their exchange rates and lower asset prices as foreign investors have withdrawn capital, he said, adding that he’s positive on India while more reforms are needed in China.

“Emerging markets’ prospects are brighter this year compared to last year from an investor’s point of view,” Lim said. “Quite a few emerging-market countries have undertaken some self-help measures," he said, citing India as an example.

Emerging economies have seen capital outflows in recent years on concern higher benchmark interest rates in the U.S. might dent investment to developing markets. India’s central bank has built a war chest, pushing the country’s foreign exchange reserves to a record last month and providing ammunition to support the rupee, one of Asia’s worst- performing currencies this year.

“India has a set of conditions that still, compared to many other countries, put it in a much more positive position,” Lim said.

While Asia’s third-biggest economy is showing the highest growth rates among the world’s major economies, it’s still struggling with a banking sector burdened with bad loans. The industry’s gross bad-loan ratio jumped to a 13-year high of 7.6 percent, according to an audit by the Reserve Bank of India published in June, and central bank Governor Raghuram Rajan, who has announced plans to leave at the end of his term in September,
has set next March as a deadline for lenders to clean up soured credit.

China’s Challenges

Lim struck a cautious note when asked if GIC would put more money in Asia’s biggest emerging market on the other side of the region. China needs to implement more significant reforms, Lim said, even though it is able to continue growing at a rate of 6 percent or more and still has “positive factors" in its favor. These include competent policy makers, a very strong central government balance sheet and a fairly good external account position, he said.

“If they implement actually many of those things that they have talked about it will raise the prospects of China substantially," he said, referring to measures to address overcapacity, introduce more competition into industry, overhaul state-owned enterprises and reform agricultural land. “If that happens and hopefully prices have not moved as much then it must mean Chinese assets become more attractive. But at this point we just have not seen enough of the implementation, so it’s hard to make that call.”

Risks from China’s bad debt situation are building up, Lim said. “It’s important that they begin to do more. They have done some. I think it’s insufficient. They have to do more.”

GIC’s real rate of return fell to 4 percent in the 20-year period to March 31, from 4.9 percent in the period through March 2015, as global stock markets had a lackluster performance and bond returns tumbled, according to the state fund’s annual report released Thursday.

The share of emerging market equities in the GIC portfolio almost doubled to 19 percent as of March 31, from 10 percent in 2010, the state fund’s reports show.

“The world has challenges almost across every continent,” Lim said. “Almost every economy has problems on their hands.”

Given the subdued investment outlook, GIC is looking to “equity-type” investments for returns, the chief investment officer said.

“For us to generate real rate of returns, I think we still have to look at equity-type assets; that means listed equity, private equity,” Lim said. “Hopefully, we can add a little value beyond what the broad market offers us, beyond what the indices offer us.”