SINGAPORE - Temasek believes the fragile state of the global economy flags the risks of stagflation, where growth slows while inflation remains elevated.
Mr Lim Boon Heng, chairman of the state investor, said: "Today we face rising inflation, higher interest rates, a lower growth trajectory and a potentially recessionary environment in key developed markets, which brings heightened risks of stagflation."
He said geopolitical tensions have intensified as a result of the Russia-Ukraine conflict, impacting global commodity prices and supply chains. As a result, central banks have tightened their monetary policies to curb the strong inflationary pressures.
"Heightened geopolitical uncertainties and tighter monetary policy, combined with expectations of slowing global growth from recent highs in 2021, leave the global economy more vulnerable and raises the risk of a recession in key developed markets."
Temasek, in its latest annual review, said it now has a cautious outlook of the global economy and, in response, will slow its investment activities as it expects more market declines, a possible recession in the United States and Europe, and the Chinese authorities struggling to achieve their 5.5 per cent economic growth target for this year.
Chief investment officer Rohit Sipahimalani said that despite the challenging environment in China, amid Covid-19 lockdowns and a regulatory crackdown on technology and property companies, Temasek remains interested in the new-economy sectors focusing on new consumption patterns, sustainability and innovation.
"We are focusing now on aligning our investments with China's policy initiatives," he said, referring to Beijing's "Common Prosperity" initiative.
Mr Sipahimalani said that while Temasek believes the impact of new regulations and lockdowns will abate, even a mild recession in the US could upset China's recovery.
For Singapore, Temasek said the global economic environment has become less supportive. While the tailwind from reopening will facilitate a stronger recovery in domestically oriented and travel-related sectors for Singapore, the externally oriented economy is particularly vulnerable to a recession in developed markets, it said.
"We remain wary of downside risks, including an escalation of the war in Ukraine and its consequences, as well as a sharper-than-expected slowdown in China's growth and heightened tensions in the US-China relationship," Temasek said.
However, Mr Sipahimalani said that despite slowing growth prospects and the uncertain outlook worldwide, Temasek will continue to chase opportunities to generate risk-adjusted returns over the long term.
"We will prudently manage the risks and opportunities arising from macroeconomic and market events. Taking into account the reasonable likelihood of a recession in developed markets over the next year, we maintain a cautious investment stance while staying focused on constructing a resilient portfolio underpinned by the structural trends we have identified," he said.
