This is an edited transcript of the opening remarks GIC CEO Lim Chow Kiat gave at GIC Insights 2024 on 13 November 2024 in New York.

The foundations of our world are undergoing profound shifts. I am not just talking about the impact of the recent US elections. These shifts go beyond cyclical fluctuations such as periodic economic contractions and expansions.  They also extend beyond predictable structural trends such as demographics and urbanisation. Shifts are happening to the foundations we have relied on for decades, such as the post-War world order, globalisation, and market-based economies; or even for millennia, in the case of climate.

These shifts are causing significant uncertainty, bringing with them a wide range of possible outcomes. Assessing their likelihood is particularly challenging because they are rare or discrete occurrences. Yet it is not all bad. For those who are prepared and open to rethinking current assumptions, there are good opportunities.

Today, I will discuss three of these foundational shifts, and what they mean for the global economy and markets.

The first shift is in geopolitics. We are moving from a world order based on free-market principles to one increasingly driven by geopolitical and state interests. These forces are slowly but surely fragmenting the globe, creating competing economic and geopolitical blocs. Consequently, there is increasing focus on resilience and security instead of economic efficiency, with higher inflationary pressures over the medium term. We must also expect more frictions in global trade and investment flows.

This new reality is likely to produce more acute event risks, including military conflicts. In the last few decades, such geopolitical events tended to create buying opportunities, such as during the Gulf Wars and after the 9/11 attack. Following initial declines, financial markets typically marched on. Today, the situation is less clear-cut. These events are more likely to spread and have spillover effects. They could also lead to permanent impairments to asset values, as seen with the Ukraine War, which resulted in the decimation of Russian bond values and has left Europe facing a difficult energy environment for the foreseeable future.

The new geopolitical landscape is also producing chronic changes to the global economy, including a shift from economic integration to increased protectionism. This is evident with the comeback of industrial policy. In 2023 alone, the IMF recorded over 2,500 new industrial policy measures, with more than two-thirds (71%) being trade-distorting. The US, China, and the EU accounted for nearly half of these policies (48%), pointing to great power rivalry as a potential driving force behind these government interventions.1

What is even more concerning is the tit-for-tat dynamics. According to the IMF, there is a high likelihood, above 80%, for a subsidy introduced by China to be matched by a corresponding subsidy from either the US or the EU within a year.2

However, there are potential upsides to this tectonic shift in geopolitics. Take the realignment of global supply chains. While businesses are shortening and onshoring their supply chains; and “just in time” has become “just in case”, new winners are emerging. For example, as manufacturers adopt a “China plus one” strategy, investments are shifting to Mexico, India, Southeast Asia and even higher-cost developed countries.  This has led to the development of new industrial hubs which can create opportunities for investors and businesses.

The second shift is in the rise of generative AI. The expectation over the potential of AI is undisputed, as evidenced by the record capex spendings by hyper-scalers and even sovereign nations. Capex by hyperscalers is expected to reach US$300 billion by 2025, driven primarily by spending on AI infrastructure.3

What is unclear, however, is the return on investment (ROI). There is an estimated $600bn capex hole that needs to be filled with AI revenue for payback.4 We have yet to identify AI’s “killer application” – a breakthrough use case that drives widespread adoption and significant revenue.5 Despite concerns over unsustainable investment levels, tech giants clearly worry more about missing out.

For investors, the key question is which part of the AI value chain offers the best risk-reward. At GIC, we see the AI value chain in three parts:

1. Enablers: semiconductor firms, cloud platforms, and other infrastructure and tools providers that benefit hugely from the AI arms race.
2. Monetisers: typically software companies which provide AI-infused products and services. Platform companies may have a particular edge given their extensive network.
3. Adopters: in the longer term, businesses that integrate AI to improve their processes could also benefit.

Let me address the third shift that is happening on a planetary scale: the climate transition. The physical and financial impact of climate change is becoming both more obvious and severe. According to the Potsdam Institute for Climate Impact Research, global annual damages from climate change may reach $59 trillion by mid-century – 6 times higher than the mitigation costs required to keep global warming below 2 degree C.6

Furthermore, climate progress is complicated by the evolving world order, the rise of generative AI, and domestic politics. For example, increased great-power competition in climate tech could accelerate innovation, but also hamper collective action on climate change.

Similarly, rising energy demand from generative AI might alter the trajectory of the energy transition. Data centres supporting AI are expected to more than double their electricity use by 2030.7 The surge in power needs could lead to a fall back on fossil fuels, setting back climate goals.

The scale and scope of the climate opportunity set is likewise underestimated. I spoke last year about GIC’s investment sizing work, which showed that the supply chain for climate mitigation solutions could offer an additional US$5 -11tn in investment value by 2030.8

Beyond mitigation, adaptation solutions are often even more overlooked. This is likely because they are viewed as preventive costs for governments to bear rather than investible opportunities. Based on data from 2021, the UN estimates that developing countries alone require up to US$366bn annually to meet climate adaptation needs. This is up to 18 times greater than current adaptation finance flows (US$21.3bn).9

While data is difficult to track, according to the World Bank, less than 2% of adaptation funding comes from private investment.10 The adaptation needs of cities, food and water systems, and even the insurance sector could open up significant opportunities. Ultimately, investors play a crucial role in plugging the financing gap for both climate mitigation and adaptation.

So, how should investors navigate these changes?

First, even as we ask “What has changed?”, we need to be clear about “What has not?”. We must anchor ourselves in the foundations that we know to be certain – our purpose, principles, and people.  Otherwise, we risk losing our way.

Then, like many global businesses, we need to raise the resilience of our portfolio to withstand multiple scenarios. This requires a good understanding of not just the external shifts I have described earlier, but also our internal variables such as our own strengths and limitations.

I want to highlight four key building blocks to constructing a more resilient portfolio – diversification, granularity, optionality, and liquidity.

Diversification remains an important part of portfolio resilience. However, we must re-examine historical correlations – assets that were once great diversifiers may no longer serve that purpose in light of foundational shifts. Previous assumptions of a reversion to the mean in some asset classes may no longer hold water.

Granularity will be more important in this new environment. Broad classifications of assets may not work as well anymore. Breaking them down into sub-segments and individual assets allows investors to better target specific risk-return profiles.

In times of profound uncertainty, there is also a need to maintain optionality, especially in the case of technology and climate. These novel assets could offer significant upside, so we must create room for them in our portfolio. At the same time, we need to maintain sufficient liquidity and flexibility to respond to new developments, and pivot where needed.

Finally, and to return to our principles, at GIC, we are doubling down on our strong commitment to partnerships. I shared this last year, but it’s a message worth repeating, especially as we celebrate 40 years in the US with hundreds of our key partners in the audience today.

Many view investing as a zero-sum game, believing that we must outcompete each other for every opportunity. We hold a different perspective. There are abundant opportunities for investors and businesses to co-create value and generate returns, as our experience has shown.

GIC embraces a mindset of being fair, friendly, and firm with all our partners. It is an approach we take seriously, apply across all geographies and asset classes, and aim to pass down from generation to generation.