January 31, 2023

Singaporean sovereign wealth fund GIC is spending money on real estate and other inflation-protective assets as it prepares for several years of disruption from rising prices.

GIC management said in an interview with the Financial Times that rising inflation could reverse the gains of recent years and warned that the world could face a prolonged period of stagflation if policymakers do not take appropriate action.

The warning from GIC, whose assets are estimated by analysts at more than $700 billion, reflects the potential impact rising prices could have on institutional investors who have benefited from accommodative monetary policy for years.

The prospect of stagflation is particularly worrisome for GIC, whose government mandate is to deliver inflation-reducing returns over the long term and boost the purchasing power of Singapore’s foreign reserves.

“We could be staring at a prolonged period of difficulty. [Stagflation] could take up to ten years,” chief executive Lim Chow Kiat said, referring to the painful mix of high prices and low growth.

Inflation could reverse “many of those gains” the GIC has made since its launch in 1981, he said. He declined to comment on the number of years of returns he expected to wipe out.

Lim spoke ahead of the release of GIC’s full-year results on Wednesday, which revealed that the fund has delivered an average annual return of 4.2 percent above inflation over the past 20 years. This figure, the key performance measure, was down from the 4.3 percent recorded a year earlier.

GIC, which does not disclose the total value of its assets, increased its real estate exposure from eight to ten percent of its portfolio in the year to March. The allocation to equities fell by two percentage points to 30 percent of total investments.

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The report followed a string of international property purchases over the past year, including the Paddington Central office complex in London and at least two student housing providers in Europe.

Short-term rental properties, such as office buildings and student housing, are less exposed to rising inflation because they can raise prices accordingly, chief investment officer Jeffrey Jaensubhakij said.

“We have to work extremely hard to find the assets that we believe will be able to survive any near repeat” of the protracted inflation of the 1970s, he said.

He said a repeat of this period would be a worst case scenario, adding that central banks now have a better understanding of the problem.