Temasek Insurance Purchase Shows Developed World Priority Shift

Emerging Markets, ADB Editions, May 2014

This week’s news that Singapore’s sovereign wealth fund, Temasek, is to take part in a Eu1.28 billion pre-IPO investment in ING Group’s NN insurance business demonstrates an interesting recent trend: emerging market sovereign wealth funds investing heavily in developed world assets.

Temasek operates under one of the most emerging market-heavy target allocations of any sovereign wealth fund in the world: a 40:30:20:10 target within which 40% is Asia ex-Singapore, 30% is Singapore, 20% is OECD countries and 10% ‘other’, which in practice chiefly means Latin America and Africa. It cemented this position after disastrous financial crisis investments in big western banks, which it exited at close to the bottom of the market.

But, while recent investments like an offer for the outstanding shares in Singapore-based global soft commodities group Olam have shown a continuing interest in emerging markets, there has been a growing sense that Temasek sees renewed opportunity in the west, particularly Europe. When most recently disclosed, mature economies accounted for 25% of the portfolio, a considerable overweight relative to its long-term 20% target allocation.

In March, Temasek announced the setting up of a dedicated Europe office in London. A New York office is to become fully operational later this year, marking a departure from previous on-the-ground priorities such as Mexico and Brazil.

Also in March, Temasek invested US$5.7 billion in a 24.95% stake in AS Watson, which is technically Asia-based (it is a subsidiary of Hutchison Whampoa) but is also a key European retailer, the largest health and beauty group in the Benelux region. Other Temasek holdings in Europe including a 6% stake in Repsol, 18.2% of Standard Chartered, 4.6% of Evonik Industries, and holdings in Lloyds Banking Group and Markit Group.

Temasek is not the only Asian sovereign fund to start looking west. China Investment Corporation, which like Temasek was badly burned by financial crisis investments in western institutions like Morgan Stanley (though in CIC’s case it didn’t sell and eventually made a profit), has focused for many years on commodity and energy plays, often in frontier markets such as Mongolia. But it, too, is setting up Europe and New York investment offices, and has been increasing stakes in US real estate businesses such as General Growth Properties and Rouse Properties. A new chairman, Ding Xuedong, took over the fund in June and spoke in January of Europe having “a lot of potential”.  In recent years, the fund has shown an interest in European infrastructure, buying stakes in Thames Water and Heathrow Airport.

Singapore’s other sovereign wealth fund, GIC’s most recent disclosed investment was in Intelligent Energy, a global group headquartered in the UK, in March; the one before that was in Australian student accommodation developer Iglu; prior to that was an interest in New York’s Time Warner Center; and before that, the acquisition of Blackstone’s interest in London’s Broadgate development. The last publicly disclosed investment in an emerging market business by GIC came back in November 2013, despite the fact that the fund has previously spoken of a renewed focus on emerging markets.

Why should this be? The trend appears to reflect two things: renewed confidence in the recovery of the developed world, alongside a sense that there is still value to be found there; and doubts about the near-term prospects in Asia itself, particularly on the back of declining Chinese growth.

Asked for comment, Temasek referred Emerging Markets to a speech by chairman Lim Boon Heng on March 28. He said the opening of offices in London and New York “does not indicate some radical shift in our approach”, but added: “We see long term opportunities in a rebalancing world.” He noted that European investment had grown but added that many of these European players were growing in Asia, Africa and Latin America. “Repsol,” he said, “gives us exposure beyond Spain.”