Global stocks have further to fall despite recent sell-off: Temasek CIO

Global stock markets have more room to decline as investors have yet to price in the odds of an economic downturn and its impact on company earnings, Temasek's chief investment officer Rohit Sipahimalani said on Friday.

The expected decline, led by the US market and expectation for inflation to stay higher for a longer period, means Singapore's investment company will be investing cautiously through the next several months, he added.

"Current valuations are not reflecting the risks and the downturn that we see over the next 12 to 18 months, so we are more cautious," he said in a panel discussion at the Milken Institute's Asia Summit, held at the Four Seasons Hotel in Orchard.

The Straits Times Index was down by 0.4 per cent by midday on Friday - its lowest level in nearly three months - although it rose 0.5 per cent at closing.

Most Asian markets also dropped - after US stocks fell to their weakest level in 22 months overnight - but ended the day mixed.

Despite the sell-off in recent weeks, expectations for company earnings - for instance, on Wall Street - have not declined as much as they should have, given the risk of more aggressive rate hikes that would crimp economic growth and corporate profitability, Mr Sipahimalani noted.

"If you do have a recession in the next six to nine months, even if it is a mild recession, you would probably see a double-digit decline in earnings," said the former investment banker, who has held various senior positions at Temasek since he joined in 2008.

"That earnings decline is not yet priced in the markets. Instead, the market is still projecting a growth in earnings in 2023," he said.

Many analysts are now projecting an imminent recession in the United States, which will be followed by an economic slump worldwide.

Temasek believes a recession in the US will likely be a mild one because most households and companies are financially better off than they were in previous downturns.

Temasek will be cautious for now. But once the risks are priced in, Mr Sipahimalani said, it will turn aggressive in line with its investment strategy.

Temasek's investment activities are aligned to four structural trends: digitalisation, sustainable living, future consumption and longer lifespans.

Beyond investing in those long-term trends, Temasek will be looking for companies with pricing power as it believes that inflation will remain at elevated levels in the next decade relative to the past, Mr Sipahimalani said.

Temasek will also add a "geopolitical lens" to its investment decisions, he added. US-China tensions, as well as fears of bifurcation and deglobalisation, will have an impact on investment decisions, he said. "That makes us focus more on large domestic markets or businesses that are self-contained within a particular sphere of influence."