Temasek Looks To Financials

(Reuters) Singapore wealth fund Temasek warned of further contagion from the global credit crisis after it doubled its full-year profit by selling billions of dollars of assets.

The fund, which poured more than US$5bn into Merrill Lynch in December, said it saw value in the banking industry, despite the U.S. subprime disaster that has forced banks to write off more than US$500bn.

“The fallout of the credit crisis will continue to dampen the global economy over the next 24 months, with sharply escalated oil and food prices beginning to test inflation expectations,” Chairman S. Dhanabalan said in the firm's annual report.

But Temasek sees opportunities in financials and said it would not cap its investments in that sector, which grew to 40% of its portfolio in the year to end-March from 38% previously.

“The financial service industry is one we believe in,” Manish Kejriwal, Temasek's senior managing director for investment, International and India, told reporters at its annual briefing on Tuesday. “It's a proxy to the economic growth.”

“We recently concentrated on U.S. and UK primarily because we see value,” he added, referring to Temasek's purchase of a 9% stake in Merrill Lynch and a 2% stake in Barclays last year. It also raised its stake in Standard Chartered to 19% from 13%.

However, Anshukant Taneja, an analyst who covers Temasek for ratings agency Standard & Poor's, warned the firm's large exposure to financials increased its vulnerability to unpredictable asset cycles and contagion.

“The investment environment is expected to remain challenging, with expectations of continued pressure on liquidity and possibly subdued trends in the equity markets,” said Taneja, who rates Temasek 'AAA', the highest credit rating, partly because of its government ownership.

However, Anshukant Taneja, an analyst who covers Temasek for ratings agency Standard & Poor's, warned the firm's large exposure to financials increased its vulnerability to unpredictable asset cycles and contagion.

“The investment environment is expected to remain challenging, with expectations of continued pressure on liquidity and possibly subdued trends in the equity markets,” said Taneja, who rates Temasek 'AAA', the highest credit rating, partly because of its government ownership.

“This may impact Temasek's ability to divest its stake in various entities and manage its portfolio.”

Temasek's net profit doubled to S$18.2bn (US$12.8bn) in the year to end-March, with its portfolio value increasing about 13% to S$185bn, helped by a S$10bn injection from the government.

“The performance to March 2008, while good, is not that surprising since the markets started falling in October and there was a strong rally before that,” said Terence Wong, co-head of research at DMG & Partners, a Singapore-based broker.

“The challenge is to perform well in the current year as equity markets have weakened since.”

The MSCI index of Asian shares outside Japan rose 11.2% in the year to end-March, but has dropped almost 16% since then through Tuesday, to a 17-month low.

Temasek said it made S$32bn of new investments in its 2007/08 financial year, double the S$16bn it spent in the previous year.

Asset sales more than tripled to S$17bn from S$5bn a year ago as Temasek sold a power plant in Singapore and cut its stakes in firms such as Bank of China, Singapore Telecommunications and Singapore Airlines

Temasek, the smaller of Singapore's two wealth funds after the Government of Singapore Investment Corp (GIC), has sought investments beyond its core markets of Asia excluding Japan to boost returns and diversify assets.

Singapore assets accounted for a third of its portfolio at end-March, down from 38% the previous year. Asia ex-Japan accounted for 41%, up from 40%.

Temasek, headed by Ho Ching, the wife of Prime Minister Lee Hsien Loong, was created in 1974 to hold and manage investments in state-owned firms such as SingTel, DBS Group Holdings and PSA International PSA.