SINGAPORE - GIC has been concerned about the "high uncertainty" in the global investment environment, compounded by the increased market valuations and low volatility, especially in developed markets, said its chief executive officer Lim Chow Kiat.
"The potential reward for risk-taking is not particularly favourable," he said in a speech at a forum in Sao Paulo on March 14 to commemorate the Singapore sovereign fund's five years of physical presence in Brazil.
Mr Lim said GIC's key concerns are inflation rising faster than expected; China's slowdown being more pronounced than expected; a "flare-up" in geo-political concerns which are regular investor concerns; and rising market vulnerabilities due to long periods of low market volatility and untested liquidity of new investment structures.
In the long term, GIC foresees structural headwinds such as demographics, high leverage and limited policy room, he said. In particular, the sovereign wealth fund is concerned about "brewing instability of the middle class" in developed countries stemming from uneven participation in globalisation and technology.
"If these persist, the result will be weaker growth. Coupled with high starting asset prices, investors face the prospects of lower future investment returns," Mr Lim said.
Meanwhile, GIC foresees emerging markets benefiting from structural improvements, contributing positively to the company's long-term real returns. Emerging markets also offer attractive opportunities for active management. Currently, emerging markets comprise 20 per cent of GIC's total portfolio.
In such an investing environment, GIC has adopted a cautious stance on betas, or broad market exposures, but Mr Lim said the group simply cannot expect then to get the same levels of historical returns.
"We need to supplement with alphas, or idiosyncratic exposures, but to do so cautiously and only in areas where we can commit to building capabilities," he added, citing the setting up of GIC's office in São Paulo as an example.
Long-term commitment to building local capabilities and widening reach via partnerships allowed GIC to expand its capabilities and partnerships in Brazil, he said. Since setting up in Brazil in 2014, GIC now has 30 people covering the market on the ground, he noted.
Mr Lim believes Brazil is on its way to recovery but important tasks are required, such as social security reforms, privatisation and tax simplification. Done well, Brazil would be able to "engineer growth and outperformance of Brazilian businesses" through low inflation rates and low nominal and real interest rates, he added.
Mr Lim said consumer-related sectors in Brazil such as healthcare and education are important to GIC, adding that it also actively looks at other sectors such as real estate, infrastructure and technology.