<TABLE border=0 cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR>June 8, 2009
TEMASEK'S INVESTMENT MOVES
</TR><!-- headline one : start --><TR>Don't shy away from risk
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->TEMASEK Holdings' track record has come under scrutiny of late after a couple of controversial steps, notably its investments in Merrill Lynch and Barclays. These investments were unfortunate, but so would be a general criticism of Temasek.
Temasek should not shy away from taking risk, particularly now.
The past 30 years have seen steady growth in the global economy. The democratisation of risk through the rise of derivatives, the growth of capital employed in active management across markets, in arbitrage and relative value as well as traditional investment, the widening and deepening of markets, have all contributed to a gradual reduction in continuous risk.
Unfortunately, it also stored up gap risk. In the period of calm preceding last year, however, the risk-reward characteristics of investments in general were deteriorating as more capital chased fewer opportunities manifesting in higher correlation between seemingly unrelated investments; the need for more leverage to eke out decreasing levels of return; and lower volatility across markets.
Risk levels got higher as risk perception got lower. In essence, risk is highest in calm waters. Once an iceberg is sighted and there is a collision, risk is converted to damage.�
Last year saw such an iceberg. Markets were no longer risky; they were damaged. For arbitrage and relative value investments, there is no better environment than damaged markets. Equities may be cheap or expensive, but given the systemic de-risking of last year, there are clearly relative value opportunities.
Mergers and acquisitions have been more active than expected as companies seek strategic acquisitions, fire sales and consolidations. Bond markets have seen a recovery in issuance and take-up has been healthy. Equity recapitalisations have been strong in emerging markets. All these are signs of a global economy healing itself.
�The timing of the disposal of Barclays and Bank of America shares may be unfortunate, but in the new world order, financial institutions are likely to be regulated as utilities with lower returns on equity.
The financial crisis represents a step change in the world order where the profligacy of the developed world is exposed and paid for over a period of decades, while the value creation and maturity of emerging markets raise productivity, economic growth and standards of living. Emerging markets are the source of demand and the source of supply of natural resources, whereas service economies in the developed world appear to be sidelined in the value chain. Bryan Goh Yong Leng
TEMASEK'S INVESTMENT MOVES
</TR><!-- headline one : start --><TR>Don't shy away from risk
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->TEMASEK Holdings' track record has come under scrutiny of late after a couple of controversial steps, notably its investments in Merrill Lynch and Barclays. These investments were unfortunate, but so would be a general criticism of Temasek.
Temasek should not shy away from taking risk, particularly now.
The past 30 years have seen steady growth in the global economy. The democratisation of risk through the rise of derivatives, the growth of capital employed in active management across markets, in arbitrage and relative value as well as traditional investment, the widening and deepening of markets, have all contributed to a gradual reduction in continuous risk.
Unfortunately, it also stored up gap risk. In the period of calm preceding last year, however, the risk-reward characteristics of investments in general were deteriorating as more capital chased fewer opportunities manifesting in higher correlation between seemingly unrelated investments; the need for more leverage to eke out decreasing levels of return; and lower volatility across markets.
Risk levels got higher as risk perception got lower. In essence, risk is highest in calm waters. Once an iceberg is sighted and there is a collision, risk is converted to damage.�
Last year saw such an iceberg. Markets were no longer risky; they were damaged. For arbitrage and relative value investments, there is no better environment than damaged markets. Equities may be cheap or expensive, but given the systemic de-risking of last year, there are clearly relative value opportunities.
Mergers and acquisitions have been more active than expected as companies seek strategic acquisitions, fire sales and consolidations. Bond markets have seen a recovery in issuance and take-up has been healthy. Equity recapitalisations have been strong in emerging markets. All these are signs of a global economy healing itself.
�The timing of the disposal of Barclays and Bank of America shares may be unfortunate, but in the new world order, financial institutions are likely to be regulated as utilities with lower returns on equity.
The financial crisis represents a step change in the world order where the profligacy of the developed world is exposed and paid for over a period of decades, while the value creation and maturity of emerging markets raise productivity, economic growth and standards of living. Emerging markets are the source of demand and the source of supply of natural resources, whereas service economies in the developed world appear to be sidelined in the value chain. Bryan Goh Yong Leng
