Singapore sovereign wealth fund GIC Pte Ltd, among the world's biggest investors, said it is now more cautious about markets compared to last year and is bracing for low returns due to high valuations and slowing economic growth.
Smaller investor Temasek Holdings is expected to report muted returns and issue a cautious outlook when it unveils its annual performance scorecard next week, analysts said.
While GIC is worried about heightened political and policy uncertainty, including the Sino-U.S. trade war, it is positioning itself to cushion the impact by investing in countries such as Vietnam which are benefiting from a shift in supply chains.
"We are more concerned, even more concerned compared to last year because the developments over the last 12 months have been more negative than even what we were thinking about," CEO Lim Chow Kiat told Reuters in an interview as GIC announced its annual performance.
GIC is ranked the world's eighth-biggest sovereign investor, managing $390 billion in assets, according to the Sovereign Wealth Fund Institute.
It manages most of the government's financial assets, invests in a wide range of assets and has a long-term goal of beating global inflation.
When asked for a comment on analysts' forecasts of muted returns and cautious outlook for it, Temasek concurred.
"While low inflation and low interest rates are great for borrowers, it's not wonderful for investors looking to squeeze returns," said Song Seng Wun, economist at CIMB Private Banking.
Underscoring its cautious stance, GIC's allocation to bonds and cash rose to a record 39% in the year that ended in March from 37% in the previous year and 31% five years ago.
Washington and Beijing have slapped tariffs on billions of dollars of each other's imports, stoking worries that the nearly year-long trade war would escalate. Those tariffs remain in place while negotiations resume.
"There are developments or events that could cause investment losses or lower returns," said GIC's Lim.
GIC's portfolio returned 4.9% per annum in nominal U.S. dollar terms over a five-year period that ended in March 2019, versus 6.6% in the period that ended in March 2018.
The firm's reference portfolio of 65% global equities and 35% bonds returned an annualised 5% in the five years that ended in March 2019. GIC reported an annualised rolling 20-year real return - its main performance gauge - of 3.4% for the latest year, the same as reported in the previous year.
Financial markets have rallied this year, with the S&P 500 and China's biggest markets surging by nearly 20% in the first half, replacing last year's big drops in European, Asian and U.S. equity markets and reviving hopes the decade-long global bull-run may not have ended after all.
But Lim said the valuation expansion and increase in uncertainty had made GIC more cautious.
Temasek, whose portfolio includes stakes in Singapore companies and Chinese banks, cautioned last year it was looking to temper its pace of investments after reporting a 12% rise in its portfolio value to a record S$308 billion ($227.2 billion) in the year that ended in March 2018.
Vietnam, emerging markets
Jeffrey Jaensubhakij, GIC's chief investment officer, said GIC still liked emerging markets such as Vietnam, where it has exposure to the home building and banking sector.
He said Vietnam was benefiting from an acceleration in Chinese companies looking to relocate their production facilities overseas to escape U.S. tariffs, while U.S. multinationals in China were also seeking to relocate elsewhere.
The share of developed market equities in its portfolio fell to 19% last year from 23% a year ago.
This week, GIC and Canada's Brookfield Asset Management Inc agreed to buy U.S. freight railroad owner Genesee & Wyoming Inc for about $6.4 billion.