During a keynote fireside chat at the stars Singapore symposium 2024, Bryan Yeo, Deputy Group Chief Investment Officer (CIO) and Director, Integrated Strategies Group, GIC, shared his views on geopolitics, the macro landscape, and the AI revolution.
The following is an adapted transcript of the full discussion. It has been edited for clarity and brevity.
Geopolitically, when you look at the world today, what do you see?
BRYAN: In recent years, we have witnessed the rewiring of the world order, with new economic and geopolitical blocs spanning different parts of the world. Supply chains are being redrawn, and there is now a greater focus on resilience and security rather than economic efficiency.
The war in Ukraine and recent military conflict in the Middle East have brought about significant macroeconomic uncertainty. This will be exacerbated by potential changes in government – almost half of the world’s population is voting in national elections this year, with the resulting political regimes having long-term implications.
The world is moving from a position of relative macroeconomic and geopolitical stability, to one where uncertainty prevails. Investors will have to contend with both short-term binary events or shocks that arise from political and military conflicts, as well as longer-term structural trends.
Building a resilient portfolio therefore requires agility, the ability to hedge positions, and an awareness of the implications of these long-term structural changes for investments, including where value will be created and destroyed.
Which markets are most impacted by this rewiring of the world order, and who stands to gain?
BRYAN: The changing world order is already affecting the global economy across trade, technology, and capital flows. Take the China strategy of many multinational companies (MNCs) as an example. Historically, they invested in China to produce goods to export to the world; today many MNCs opt for an “in China, for China” approach. The market has a population of 1.4 billion with high consumer demand fuelled by a rising middle class. For many MNCs, exiting China remains unthinkable, despite current trade tensions with the US.
Following China’s Covid-19 lockdowns, many manufacturers adopted a “China plus one” strategy to mitigate the impact of the resulting disruptions. This redrawing of supply chains has seen the emergence of numerous “middle powers”. Mexico, for instance, is benefitting from its proximity to the large US market and consumer base, with many global companies setting up production facilities in the country. Southeast Asia has also been a major beneficiary of this trend. Vietnam has for many years been an integral part of global supply chains in certain industries like textiles. Thailand’s capabilities in auto manufacturing have drawn significant investment inflows from Japanese car manufacturers. Similarly, Malaysia’s capabilities in electronics manufacturing and semiconductor assembly and testing have led to increased investment from MNCs in these areas. Indonesia’s abundance of raw materials, which are critical to the development of emerging industries like batteries for electric vehicles, has prompted the country to shift from an exporter of unrefined commodities to an exporter of higher-value processed products.
Protectionism, however, remains a risk. The US 1 and Europe 2 have recently imposed import tariffs, with the threat of more to come if protectionist sentiment grows. Such measures will raise costs and likely worsen inflation at least in the medium term as companies will have to source alternatives that will probably be more expensive, while passing some or all of these extra costs to consumers.
The past few years have seen high inflation. Is it finally coming down, or will it be with us for the longer term?
BRYAN: Global indicators signal that the supply chain shortages that we saw during the Covid-19 era have normalised. We also see goods pricing dip, indicating that the goods inflation era that stemmed from these shortages is behind us. The US Consumer Price Index fell from 9.1% in June 2022 to 3.0% in June 2024 3 for instance.
However, three key factors might prevent prices from falling further: wages are politically difficult to cut; we are dealing with higher commodity prices overall; and the emergence of new economic blocs and the rewiring of supply chains are contributing to greater inefficiencies and higher costs. For the foreseeable future, inflation is likely going to be volatile.
With volatile inflation, how might Fed rate hikes impact the markets, especially those in Southeast Asia?
BRYAN: Historically, when the Fed hiked rates to cool an overheating US domestic economy, emerging economies like those in Southeast Asia experienced tighter liquidity conditions and capital outflows.
However, there are a few key differences between then and now. Firstly, many emerging markets have experienced their own crises or learnt from others who did and have instilled fiscal discipline to mitigate the impact of such events.
Secondly, 10 to 20 years ago, a high proportion of their sovereign debt was issued in hard currency. When local currencies depreciated, debt levels went up in local currency terms. However, today, the proportion of sovereign debt issued in local currency is significantly higher than what it was back then. Emerging market balance sheets are generally in a stronger financial position than before.
In contrast, some developed market countries are experiencing deteriorating fiscal trajectories. Might this lead to another crisis if debt levels become unmanageable?
BRYAN: In the developed world, governments spent an average of about 21-41% of GDP on total fiscal stimulus in 2020 compared to 3% in Africa 4 and only 1.8% in the least developed countries. These helped stave off a deep recessionary period that would have otherwise taken place. At the same time, it also created an inflationary wave, seeding the potential for a difficult fiscal trajectory in the future.
In the US for example, the Congressional Budget Office has recently projected the deficit to grow from 5.2% of GDP in 2027 to 6.1% in 2034 5 . Meanwhile, the amount of debt held will rise from 99% of GDP today to 116% of GDP within 10 years 6 – the highest level ever recorded. Fuelling these spending increases are industrial policies, economic security, and climate goals. Yet so far, there is no clear policy on where the funding will come from.
The long-term outlook for US fiscal trajectory and sovereign debt is mixed. The bulls believe that the administration can put in place a credible plan and increase revenues through tax hikes, should it need to. The bears believe that conditions will continue to deteriorate, with a bond sell-off eventually forcing the government to intervene to cap the rise in yields, which then translates to significant USD weakness.
Demand for US sovereign debt will continue for the foreseeable future, however. The US dollar remains the world’s only dominant reserve currency, which gives the US a greater runway in pushing debt boundaries.
When you consider the potential of artificial intelligence (AI), how much of today’s conversation is real, and how much of it is hype?
BRYAN: AI has been around for years. What’s changed in recent times is the emergence of generative AI (gen AI) with the likes of ChatGPT. This democratised access to generative AI and has boosted productivity across various tasks.
Like other technologies, AI adoption will occur in stages. The early stage, which is where we are today, sees AI helping us carry out routine tasks in an automated fashion. Next will be the proliferation of the virtual personal assistant or the co-pilot, assisting us with our work. Multi-modal AI is round the corner, where images, sound, video recordings, and other multimedia content beyond just text, can be ingested for analysis, fueling an exponential increase in use cases across various industries. Beyond this, AI may be able to progress towards new content creation independently. The ultimate potential of AI is superintelligence, but this is many years away if we even get there.
Industries are already being impacted. The semiconductor ecosystem is already benefitting and in the near term, digital infrastructure providers including data centres and cloud vendors are also going to see a boost. The software space can likewise benefit, provided it can successfully integrate AI into its suite of services. The industrials and automation spaces should also receive a productivity boost. However, the scale of AI deployment won’t be equal across all industries, as the technology continues to evolve and may only be commensurate with the successful development of certain types of use cases at different junctures.
When it comes to novel technologies that are revolutionary, investors and corporates tend to overestimate what’s possible in the near term, hence raising questions about the ROI on AI capex spend, and underestimate the real addressable market over the long term.
In terms of AI, we have already seen a good mix of hype and real value creation. The crux of AI's investability lies in the true value it brings to a company in enhancing productivity, processes, and decision-making.
What other factors must investors consider when exploring opportunities in AI and technology more broadly?
BRYAN: Data is a key differentiator; particularly how we collate data and build architecture to facilitate its management and analysis. However, companies often don’t have access to the comprehensive set of datasets they need.
Take the global pharmaceutical scene: companies are using AI to build capabilities in-house, notably in diagnostics and drug discovery. Yet to take things to the next level and develop new drugs, they should ideally share data among their peers.
Despite ongoing discussions among business leaders on how this can be achieved, there are valid reasons why companies do not share data. For one, industry leaders will probably be able to get more out of shared data than others, enabling them to pull even further ahead in terms of capability; smaller players may hence be hesitant to participate. Regulatory constraints such as data privacy laws might also hinder the exchange of information. Ultimately, stakeholders need to find the right balance of partnership and incentives to overcome existing obstacles.
Another factor is investment horizon. For instance, despite many potential use cases in the humanoid robotics space, most will require continued investments for the next five to 10 years, with no clear end in sight. Investors and corporates must carefully weigh the risk-reward of such investments versus technologically proven, mature solutions available in the market.
When you look at the world today, which investment opportunities excite you the most?
BRYAN: One of the most exciting trends is AI. We are optimistic about the use cases emerging today, and expect many more across a wide range of industries. Eventually, the space will be turbocharged when quantum computing comes online.
A second area is the energy transition. The world needs to decarbonise, and to achieve the IEA scenario of net-zero carbon emissions by 2050, the global economy must finance US$126 trillion worth of projects7. This presents an enormous investment opportunity.
Healthcare is also a key focus, especially given the world’s ageing population. Despite the recent introduction of drugs like GLP-1 to treat obesity and associated diseases, the world will still need more healthcare innovation and capabilities.
Digitalisation is another trend to watch; particularly how technological processes and systems improve, and increase productivity across various companies and industries, especially in emerging markets.
Put simply, these trends are of note because there is a long-term need.
