This is an edited transcript of the keynote speech GIC CEO Lim Chow Kiat gave at the Wealth Management Institute (WMI)’s Global-Asia Family Office (GFO) Summit 2024. 

Profound changes are happening in the world.  They go beyond cyclical fluctuations such as periodic economic contractions and expansions, and beyond predictable structural trends such as demographics and urbanisation. Cracks are appearing in the foundations on which we have been building for decades, such as the post-War world order, globalisation, and market-based economies; or even for millennia, in the case of climate.  These cracks have been forming unnoticed for a long time but are now making headlines.   

 These cracks come with a great deal of uncertainty.  There is a wide range of possible outcomes. One can win big, or lose big, with comparable probabilities. In other words, pitfalls and windfalls await in equal measure. They are also rare occurrences, making it quite challenging to assess and prepare for them.    

 Today, I will briefly discuss three sets of them. I will start with the pitfalls. 

The first pitfall relates to the evolution of the world order as we know it, including its market-based economic and financial architecture. Geopolitical forces are slowly but surely fragmenting the world, creating competing blocs. Consequently, there is increasing focus on resilience and security instead of efficiency.

This new reality is likely to produce more event risks, including military conflicts. In the last few decades, acute geopolitical events tended to create buying opportunities, such as the Gulf Wars and 9/11. Financial markets marched on after some initial declines. Today, the situation is less clear-cut. These events are just as likely to produce permanent losses, as seen with the Ukraine War.

Equally important are the chronic changes, such as the realignment of global supply chains. Businesses are shortening and onshoring their supply chains, as well as diversifying their suppliers and customers. “Just in time” has become “just in case”, leading to increased costs.

A key force behind this evolution is the rebalancing of powers – the rise of the rest. Income gaps between countries have narrowed in the last few decades, with the Asian middle class chalking up significant absolute and relative gains.1 This puts pressure on the prevailing order.

This pressure is further fuelled by rising inequalities within countries, exacerbated by rising living costs in recent years, particularly in advanced economies where the real earnings of the middle class have already stagnated for many years. The reasons for this trend are complex and may include factors such as national endowments, economic policy, technological change, globalisation, and labour mobility.  However, the political outcome is clear: the rise of anti-establishment sentiments and the weakening of the political centre. This can lead to the politicisation of issues around regulations, taxes, immigration, trade, and foreign investment – issues of great importance to investors and businesses. 

Looking ahead, with AI on the horizon, inequalities are likely to worsen. This is the second pitfall. The IMF notes that the productivity gains of generative AI tend to accrue to those already equipped with the infrastructure, workforce, and skills.2 By its nature – general purpose, high entry barriers, network effect, and speed – AI increases the likelihood of a winner-takes-all outcome, benefitting a few while leaving the rest behind.

The third pitfall comes from the climate crisis. Last year, new records were set for the hottest year3 and fastest sea level rise.4 The physical and financial impact of climate change is now difficult to ignore. According to the Potsdam Institute for Climate Impact Research, global annual damages caused by climate change will reach US$38 trillion by mid-century – six times higher than the mitigation costs required to keep global warming below 2 °C.5 Investors must face up to this risk.

However, where pitfalls lurk, so do windfalls. For those with the foresight and conviction, today’s challenges may be tomorrow’s great opportunities.

The first windfall is found in the redrawing of supply chains. The “China plus one” strategy is already shifting investments to Mexico, India, and Southeast Asia, creating opportunities for investors who are alert and agile.

The second windfall is AI’s potential productivity boost, estimated to translate into a 7% increase in global GDP (~US$7 trillion) in the next ten years, according to a recent Goldman Sachs report.6 As more use cases are rolled out, we can anticipate significant cost savings, efficiency gains, and new business models.

For investors, it is a matter of value capture.  At GIC, we find it useful to look at the value chain as comprising:

1. Enablers, which benefit from capex spending, including semiconductor firms, cloud platforms, and tooling companies.
2. Monetisers, which provide AI-infused products and services, including software companies.
3. Adopters, which are businesses that integrate AI to improve their processes.

The third potential windfall arises from financing the climate transition. Based on GIC’s research7, the decarbonisation and climate solutions supply chain could add US$5-11 trillion in investment value by 2030. Sectors such as electricity networks, sustainable vehicles, EV charging infrastructure, solar, wind, lithium, hydrogen, and building heating are big opportunities. Most of them are in fact mature solutions readily investible today.

How are investors to navigate such an uncertain landscape? The starting point is to know ourselves – our unique purpose, specific risk tolerance and risk preferences, return objectives, horizon, strengths, and weaknesses. In a fast-changing world, this is easily forgotten.

Let me briefly discuss three other points – price discipline, diversification, and partnerships.

Maintaining price discipline delivers steady compounding of returns. This involves carefully weighing the risk-reward prospects of each investment, ensuring that we are adequately compensated for the risks we take. Family offices, with their long time horizon, are well-positioned for this.

In addition to finding gains, it is equally important to avoid losses.  It may be useful to “invert” to think about the causes of losses so as to avoid them.  Historically, permanent losses typically come from poor operating results, over-leverage (losing key to creditor), exogeneous shocks, and fraud.   

Less obvious but equally devastating are permanent losses from exceedingly high investment costs, or paying too much for investments.  This can result in many years of poor returns, akin to permanent loss, such as buying the Nikkei in 1989 or the Nasdaq in 2000.  

Diversification is also crucial for dealing with uncertainty. The benefit of diversification was first mathematically recognised in Harry Markowitz’s 1952 Modern Portfolio Theory, which later won him a Nobel Prize.  The theory suggests that the risk/return profile of individual assets matters more as portfolio components than on their own.  Through this lens, diversification offers lower risk at the same return, or higher return at the same risk. 

Obviously, if one had perfect foresight, there would be little need to diversify.  In the past two years, holding just US stocks would have done quite well, or better still, concentrating on the Magnificent 7 stocks. But short of perfect foresight and in times of profound uncertainty, diversification is needed for more reliable portfolio returns.

Lastly, we need more partners. Partners give new perspectives, act as sounding boards, and offer new networks of opportunities. Good partners offer wise counsel and inspiration. This is a key reason why WMI places so much emphasis on convenings such as today. At the end of this Summit, I hope you take away not just good ideas but many valuable connections.

On that note, let us recognise the unique position we occupy. We are stewards of capital with the power to influence the future direction of the global economy. This is both a privilege and a responsibility.