This is an adapted transcript of a keynote speech by GIC Chief Investment Officer for Private Equity, Choo Yong Cheen, delivered at Sequoia’s annual investor conference, PitStop.

Good morning. It is very good to see everybody here today. Thank you for inviting me to speak at this year’s conference and I look forward to learning from everyone here – from Sequoia, fellow investors, and business leaders from all over the world.

I’ll take the time today to share more on how GIC, a multi-asset manager, is thinking about the long-term issues that the world faces today and our investments in emerging markets and technology over the decades.

As a quick introduction, GIC is Singapore’s sovereign wealth fund. We were set up in 1981 to invest the country’s foreign reserves. Today, we invest globally across all major asset classes, from public markets, which includes fixed income and public equities, to private markets, which includes real estate, infrastructure, and private equity. Specifically, our private equity portfolio spans across venture, growth, and buyouts. We invest through funds but also directly in many companies.

We have a long history of investing in technology. Interestingly, GIC’s first overseas office was set up in San Francisco in 1986. And perhaps more interestingly, our relationship with Sequoia began even earlier in 1985. Today, GIC and Sequoia continue to work closely together as they share our vision in partnering with category-creating technology companies across different geographies and across various stages of investments.

Our investing philosophy

In our technology investing efforts, GIC is a patient, long-term investor that invests across the entire lifecycle of companies. It is important to us to provide support to businesses from the earliest stages, sticking with them as they mature and grow, and then staying invested even after they have gone public. To do this well, we invest early, ahead of the cycle.

We see ourselves as a collaborative and committed partner. It is in our best interest to help forge connections for our portfolio companies around the world. With our global presence and 11 offices worldwide, we are able to connect partners across Asia, the Americas, and Europe, to deepen their collective knowledge of disruptive and innovation trends as we share exclusive industry insights.

GIC set up our technology investment group (TIG) in 2017 to best capture the right opportunities in the technology space and to continuously value-add to our portfolio companies. I’m very happy to be able to attend this event because of the strong relationship that TIG has with Sequoia, fostered over the years of investing together.

Near-term macro outlook

In all of our investing activities, we have to consider the macroeconomic environment. Today, the near-term global macro outlook is a challenging one. Interest rates will have to continue to be tightened to bring down inflation. In the US, inflation has come off a bit but remains quite high and is some distance above where the US Federal Reserve wants it to be. Some believe that inflation is rolling over and will come down automatically, but there is still a lot of momentum in the economy as well as the labour market, which continues to be very tight.

So, without a faster slowdown in the economy, it is unlikely that inflation will just decrease automatically. The Fed will have to continue to tighten for the economy to slow, but when the Fed tightens, the economy risks tipping into a recession. Of course, the wish is for a soft landing, where the economy slows by just enough to cool inflation and the Fed can back off. This time around, even if the stock markets were to weaken, the Fed may be forced to continue tightening because inflation continues to stay high. So, the risk of a recession in developed markets is very high.

A worse scenario is the world transitioning into a stagflationary environment – a multi-year process where inflation stays very high even though the economy slows down.

Long-term macro outlook

The longer-term outlook is not much better either as the world must grapple with three key challenges: inflation, geopolitics and climate risks.

Inflation could stay high: If inflation were running at, say, 2%, not many people would ask for a pay increment and a lot of companies could live without offering one. However, if inflation is at 6 to 7%, everybody will be asking for a pay increment and companies will be forced to provide it. This creates a spiral of continued high inflation expectations.

Meanwhile, supply-side issues, supply chain problems, and the energy transition continue to contribute to high inflation. Central banks also do not mind a certain level of inflation so that the debt burden on an economy does not get too high. This is also known as “financial repression”.

Given both these factors, it is likely inflation will stay high. The risk of central banks being in this reactive mode is that they may not be able to act in time if inflation spirals out of control.

Geopolitical risks will remain high: It is unlikely that geopolitical risks will subside. The question now is, how bad can things get? As geopolitical risks heighten, the world will go into a more protectionist mode. You will see governments take care of their own systems with more nationalistic industrial policies.

We will also likely see the role of the government increase in many areas, including income inequality, industrial policy, taxation, regulation, and more. We will witness a decline of the free flow of goods and services, ideas, and capital, as well as a fragmentation of the supply chain. Risk premiums will generally also stay high.

Lastly, climate risks: In light of recent and ongoing extreme weather events, it has become clear that the impact of climate change is very real. Governments will have to act forcefully which will, in turn, result in more regulation.

How can investors respond to this changing world?

I think the first thing is for investors to recognise that the world has changed. Inflation and interest rates will stay high and markets are going to be a lot more volatile. The cycles are also going to be much, much shorter.

Secondly, as a large investor, diversification is important. It’s critical to maintain a portfolio with some assets that do well in an inflationary environment, and others that do well in a deflationary environment.

Investors should also have options. Cash, of course, hasn’t been a good asset to hold, but cash provides optionality. What we have done over the past few years has been to adopt a defensive stance, preserving optionality and waiting for opportunities to arise.

We are only in the first few innings of this correction. The market is trying to find an equilibrium and I think, over the next year, investors will see really interesting opportunities emerge, for which dry powder will be needed.

Navigating the tech transition 

Whilst one should be bearish and cautious from the top-down level given the macro environment today, there are still many bottom-up opportunities to take advantage of. There are certain assets in vogue right now because they do well in an inflationary environment, such as real estate and infrastructure. GIC has a fair share of allocation to those assets.

But ultimately, what can out-earn inflation are the companies with steady performance that can do well over the long term. After the valuations have adjusted, capital will flow to companies that can consistently grow earnings higher than inflation.

So eventually, money will flow back into equity markets and into the technology space – a sector with great potential for growth. It is where companies are being built currently to solve the problems that both society and the economy are facing.

Although the technology sector’s valuation multiples are unlikely to return to past levels and returns may not be as high as expected, past experience has shown that in this environment, strong companies can still be built.

At the same time, there is a lot of dry powder and cash sitting on the sidelines. Certain funds have raised large amounts of capital and a lot of people are looking for opportunities. All this points to the fact that there will still be capital available to invest in companies, leading to real growth and healthy cash flows.

Positive structural trends in India and Southeast Asia

Emerging markets tend to do well when the US dollar cycle starts to turn. Typically, when the US dollar strengthens, companies in emerging markets will run into a current account situation and a payment crisis. This time, these issues have been handled relatively well so far, which makes emerging markets a good place for investors today, especially with valuations being relatively low.

In particular, India and Southeast Asia are attractive markets. GIC started investing in India in the 1990s, which makes us one of the earlier investors there, and similarly, we have been invested in Southeast Asia for a long, long time.

Both India and Southeast Asia are hitting an inflection point on the cyclical side, in terms of macro fundamentals. In India, the inflation situation seems better controlled and there isn’t that much of a risk of demand-pull inflation. In fact, if you take out high oil prices, the inflation picture in India is relatively benign. The Reserve Bank of India has taken steps to ensure they stay ahead of the game and India’s current account deficit and external debt-to-GDP remain healthy. Southeast Asia is also looking very healthy, from a cyclical perspective.

Technology investing in India and SEA

More importantly, the two economies are going to enjoy significant structural tailwinds. India and Southeast Asia have young, large populations and are finally reaching a stage where manufacturing is taking off at scale. This kicks off a virtuous cycle of more employment growth, more investments and productivity which leads to higher income growth and higher levels of disposable income, which in turn drive demand growth.

We also see positive trends in digitalisation, including advancements in digital payments and logistics, which are helped by increased access to broadband and affordable handsets. India and Southeast Asia are also considered attractive locations in a world that is grappling with a multitude of geopolitical risks.

You have already seen large amounts of capital flowing into these two locations. Indonesia, for example, is now becoming an auto-powerhouse, manufacturing cars for the Chinese and the Japanese markets. Every company in the world is thinking: Where do I want to put my next production base?

This is the second reason to be positive about India and Southeast Asia. Their governments will continue to ensure an influx of capital into the economy given a shift in recognition that good economics is good politics. This has become very clear in India where reforms are implemented at a very rapid pace in terms of taxes, monetisation, and the push for manufacturing and industrialisation. India’s RBI also enjoys greater central bank credibility.

Interestingly, we are also witnessing the digitalisation of infrastructure, especially in India where the government has built a platform which allows companies to just focus on their business, without worrying about solving complex technical issues. In Indonesia, the developments are less driven by the government, but we are seeing a lot of their infrastructure digitalise as well.

Third, businesses in India and Southeast Asia are building world-class products and services for the world. India is now offering not just manufacturing, but IT software and services globally. A lot of very innovative technology companies are emerging in the country.

Southeast Asia and India are therefore increasingly well-positioned to grow into a hub for innovation and growth in the next five years and beyond.

Implications for founders

So, what does this all mean for founders? In our years of investing, we’ve come to learn that founders who tend to be able to navigate crises better have the following characteristics:

• They are agile and can adapt to changing market realities.
• They build resilient business models, focusing on the fundamentals and not taking shortcuts.
• They engage well with their shareholders. This is where having a shareholder base that is committed, which understands the business, and is prepared to put new money into a good business plan, is important. Founders who are on the same page as their shareholders will more likely be able to work together to execute their business plan.
• They have an unwavering focus on corporate governance, meaning that when circumstances are bad, it becomes all the more reason to do the right thing. If the business model is the right one to start with, the founder will hold true to it.

With that said, I’ll end by saying that despite today’s gloom and doom, there is still much cause for optimism in the tech space and in India and Southeast Asia. We continue to encourage our bottom-up teams to source for the right opportunities and look for companies with good business plans.

Thank you again for the opportunity to speak today.