2022 SINGAPORE PROGRAMS
INSIGHTS
Executive Seminar & Asia Pacific Roundtable
The Pacific Pension & Investment Institute (PPI) convened in Singapore from October 16-21, 2022, for its first programs in Asia since 2019. The Executive Seminar featured conversations with industry and government leaders, and business site tours showcased Singapore’s evolution into a hub of innovation. The Asia Pacific Roundtable explored important trends in the Association of Southeast Asian Nations (ASEAN) and the opportunities and challenges for long-term investors. The week’s discussions offered PPI members greater insight into the dynamism of Singapore and Southeast Asia in a challenging global environment.
Enhancing Food Security and Sustainability
Though previously ranked as the world’s most food-secure country, Singapore is heavily dependent on food imports, which account for over 90 percent of the island’s food supplies. The government sees import dependency as a significant risk to the city-state’s food security – a view that several recent events have proven. Export bans by trading partners can directly and immediately impact food prices or supplies altogether. For example, Malaysian poultry, Vietnamese rice, and Indonesian palm oil experienced varying degrees of short-term export tightness. And while there is a high degree of import diversification, the concept only works to the extent that there isn’t a systemic global or regional disruption, such as a pandemic.
It is expected that these supply shocks will happen more frequently. Thus, it is imperative for places like Singapore to add local food production capacity. The government has outlined two pillars (verticals) to achieve this goal. The first is promoting indoor vertical farming, which is already beginning to scale.
Delegates visited an indoor vertical farming facility in Singapore’s Jurong-Boon Lay area. After sampling seven types of high-value crops (some with distinct and memorable flavors) suitable for salads and artisanal cooking, participants were shown the vertical farming systems that yielded this fresh produce. They learned about the advantages of these systems over traditional land-based farming methods (in terms of yield, water efficiency, land use, and pesticides), as well as the unique designs that differentiated them from comparable indoor farming systems. It is worth noting that the Singapore government, through the Singapore Food Agency, may reimburse up to 70 percent of the development cost of such projects through grants.
There is also a purpose-built solution for restaurants, schools, and hospitals – customers that are more sensitive to the product’s freshness and nutritional value. The founding and operating team also shared their latest project, which involves a horizontal but more automated system designed for Chinese greens.
The second pillar is exploring alternative proteins such as cell-based meat. Singapore has become the first country in the world to develop a regulatory framework to approve cell-based proteins in collaboration with a panel of global experts. There is also an incentive for Singapore to share this standard internationally to promote wider adoption and acceptance, which would ultimately drive down production costs. In addition, there is a horizontal effort in food safety research and public awareness and acceptance campaigns. For example, community farming is encouraged in residential developments, mainly to improve the public’s appreciation of food security (and reduce food waste). The government may also engage social media influencers to assist with the general acceptance of food produced through new and local ag-tech and food-tech.
Delegates also toured an offshore aquaculture facility located in the waters of Singapore’s Serangoon Harbor. The facility features the latest iteration of the Recirculating Aquaculture System (RAS), considered more advanced and efficient than traditional fish farms such as flow-through or net cage systems. Dubbed aquaculture 4.0, a RAS can also integrate automation, data collecting, and data analytics. Sustainability design features of the facility include on-site solar power generation, which provides 30 percent of the energy needs for the farm. There are also significant improvements in waste management. Revenues of the facility not only come from the sale of fish but also through the sale of turnkey solutions to customers who would like to operate their fish farms more efficiently.
Singapore Institutions and
Their Global Competitiveness
The most significant, if surprising, contribution to Singapore’s GDP comes from the country’s manufacturing sector, at 22.3 percent. By comparison, some more well-known industries, such as wholesale trade, account for only 17.9 percent, while finance and insurance stand at 14.6 percent. Therefore, while Singapore has a robust service sector, its economy is driven by manufacturing, particularly aerospace, electronics, chemicals, and pharmaceuticals.
For instance, Dyson has chosen Singapore as its global headquarters, a prime example of Singapore’s manufacturing prowess. The company’s ability to use Singapore as its Southeast Asian hub and command the production of its core parts and products in Singapore, Malaysia, and the Philippines, provides a competitive advantage. Leveraging its presence in Singapore, Dyson will soon become the largest foreign direct investor in the Philippines. And precisely as the Singapore government envisaged, the company is also benefiting greatly from the robust support in functions such as finance and human resources in Singapore.
Singapore is a haven for entrepreneurs and the global business community thanks to the stability and predictability of its business environment, which takes careful long-term planning. For example, the Singapore government conducts national scenario studies every five years. The government’s current suite of policies to further enhance the city-state’s global competitiveness can be summed up with “3Ts:” Talent, Twinning, and Taxes. While Talent and Taxes are self-explanatory, Twinning refers to the concept of encouraging manufacturing companies to combine the relative advantages of Singapore (e.g., legal, financial services, research, and development, etc.) and those of its closest Southeast Asian neighbors (e.g., land and labor resources). Further out on the horizon, Singapore government agencies are closely monitoring geopolitical developments and taking anticipatory steps to combat the effects of climate change.
A Premier Global Maritime Hub
With a smaller domestic consumption market, Singapore has always been a trans-shipment hub rather than a gateway port. It currently handles 36 million twenty-foot equivalent units (TEUs) annually. Construction of the Tuas port in the western part of the island is expected to be complete between 2025 and 2027, when it will replace the current port at Keppel. It will also give Singapore an additional 30 million TEUs of port capacity. Singapore is the only port in Southeast Asia that can handle 20,000 TEU vessels.
But capacity cannot be Singapore’s only advantage. Singapore needs to be more than just a port to ship owners and operators, many of whom have chosen Singapore as their regional headquarters, ship registry, and logistics center. Modern shippers place a high premium on warehousing, label printing, and re-packaging to change their business model from a cost game to a service game. The trend in new ship orders is a preference for smaller vessels (9,000 – 15,000 TEUs), which also partly reflects the changes in international trade. Singapore’s role as a trans-shipment hub may evolve as the “hub-and-spoke” model cedes some of its business to direct shipping lines, especially intra-Asia. Another big challenge facing Singapore as a major port is the green transition. The Singapore government collaborates with global ship owners on innovations to help decarbonize the shipping industry.
Venture Capital Activities
As a catalyst for innovation, venture capital investing thrives in Singapore, especially at the seed and early stages. Local entrepreneurs and founder teams who came to Singapore from around the world are reaping the benefits of the city-state’s economic policies that encourage innovation, the robustness of financial and other support services, and access to global talent for executing their business ideas. In recent years, Singapore has also seen an influx of venture capitalists, high-net-worth individuals, and family wealth, notably from China, which is likely to become a steady supply of capital for entrepreneurial activities. Finally, Singapore will continue to serve as the innovation hub for the rest of Southeast Asia, where existing infrastructure is lacking, and hence opportunities for innovation abound.
ASEAN Centrality &
Developments in Southeast Asia
The Association of Southeast Asian Nations (ASEAN) is at the strategic center of various regional and global issues, such as free trade, digital transformation, and climate change mitigation. ASEAN centrality promotes peace, stability, and prosperity in the Southeast Asian region. Since its inception, ASEAN member nations have had no significant conflicts. ASEAN will continue collaborating with external partners to ensure a free and open Indo-Pacific region.
For example, the Regional Comprehensive Economic Partnership (RCEP) is a testament to ASEAN leadership beyond Southeast Asian nations. The first version of the ASEAN Taxonomy for Sustainable Finance will drive the green transition and other types of sustainability progress in the region and set examples for the international community. ASEAN centrality cannot be taken for granted – it must be earned. It is ultimately about serving its member states.
Institutional investors in Southeast Asia are beginning to emerge as new leaders in environmental, social, and governance (ESG) issues, just as some of their developed market counterparts are going through a period of debate and hesitation. To them, ESG is both a risk and an opportunity. They believe governance should come first, and other elements will follow. In this part of the world, human rights issues, such as women and child labor, can still be challenging. Local institutional investors have put in place the concept of human rights due diligence as a part of their investment process.
From the perspective of a multilateral development bank, top economic and human development priorities in the region include recovery from the pandemic, debt sustainability, and climate change resilience. Multilateral development institutions have and will continue to provide financial assistance, on generous loan terms, to countries in need, so they don’t have to turn to alternatives that may lead them down unsustainable paths.
The aggregate GDP of Southeast Asian nations stands at 4.5 trillion USD today, making the region, as a bloc, the fifth largest economy in the world. However, the region is anything but homogenous, so businesses and investors have concluded that they need to develop country-specific strategies.
Vietnam, for example, is a rising star in the region. The biggest growth driver in Vietnam in the past few years has been domestic consumption, thanks to middle-class expansion and urbanization, rather than manufacturing exports, as outsiders might expect. A high female participation rate in the workforce is also a significant trait of the Vietnamese economy. Indonesia, being the largest consumer market in the region, is now seeing the emergence of dominant “super apps” out of mergers, providing a wide range of services such as ride-sharing, food delivery, payments, and online retail in one single app, which builds on, and is a testament to, mobile penetration in the country.
Geopolitical Uncertainties
Other notable risks in the world include the decline or deficit of political leadership around the world, in both autocratic regimes and democratic societies, as well as the endangerment of the framework for non-proliferation of nuclear weapons, as more nations desire their own nuclear deterrence capabilities.
Vladimir Putin made a colossal miscalculation in Ukraine. However, the Western world’s response, particularly in selling the ideology of autocracy versus democracy to the global south, has not been successful either. It is possible that battles on the ground in Ukraine can be further drawn out for another year or two, or it could become a frozen conflict. As such, Western sanctions on the Russian economy will remain in place over the mid-to-long term.
That said, Russia is a second-order issue. Today, the world’s first-order issue is U.S.-China relations, the theme of which will decidedly be competition and rivalry. It will lead to bifurcation in international trade, technological standards, and information. There is, however, still room to maneuver as competition is not conflict. The risk is not a conflict by design but rather by accident.
Being caught in a great power rivalry is not new to Southeast Asian nations. China has been a constant presence throughout the history of Southeast Asia. It is said that a worthy political leader of any Southeast Asian country should be able to stand up to China and get along with it simultaneously. ASEAN nations should avoid falling into a false sense of control under ASEAN centrality. They should seek to build coalitions fluidly, based on specific issues, rather than on political ideology.
China after the Party Congress
China has credit and economic cycles, which often contradict the West’s. This is a fundamental reason why investing in China can diversify portfolios. The current zero-COVID strategy is not sustainable for China’s economy, especially at the municipal and provincial levels. The pathway to easing will gradually become visible following the conclusion of the 20th National Congress of the Chinese Communist Party. Language and critical performance indicators (KPIs) concerning economic development have resurfaced in the meeting transcripts.
However, under the policy of “Common Prosperity,” the quality of economic growth will matter more going forward. In other words, China’s era of growth for growth’s sake, or growth at all costs, has effectively ended. One way to interpret “Common Prosperity” is that it is the evolution from tackling poverty in China to addressing the quality of life for the Chinese middle class (400 million people) and closing the wealth gap. The Chinese government is not anti-business per se; its focus is on ensuring that companies are not too monopolistic and do not profit at the expense of the welfare of society.
Contrary to what the media has portrayed, Hong Kong is not taking orders from Beijing. It governs its affairs and has its policies around COVID, for example. Hong Kong’s judicial independence is fully intact, as it is impossible to integrate a standard law system with China’s. The national security law imposed on Hong Kong is different from the one implemented on the mainland to account for Hong Kong’s Special Administrative Region status. It was not the central government’s intention to impose this law, but the events on the streets in Hong Kong in 2019 forced Beijing’s hand, and it had no choice but to step in and restore law and order.
India: Creating Value
Through Building Businesses
Despite regional opposition at the individual state level, India is currently enjoying a period of relative political stability, thanks to the strong leadership of Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP). Demographically, 65 percent of the Indian population (1.4 billion people) is under 35. The population is still growing at one percent per annum (compared to China’s population growth rate of 0.1 percent per annum). India has also successfully implemented what is often referred to as the Indian Tech Stack, or the India Stack, which is a set of application programming interfaces (APIs) and digital public goods that aim to unlock the economic potential of a national database of identity, biometrics, and financial transactions, at the scale of the Indian population.
Built on these foundations, Indian entrepreneurs and enterprises can scale up dramatically, despite India’s complex business environment and legacy systems. Foreign institutional capital has and could continue to play a flagship role in India’s development, as domestic capital has tended to follow their directions. As in building businesses elsewhere, execution is critical in this market, and finding the right local partners in India is significant.
Capital Markets and the Energy Transition
A key challenge to the global energy transition is scaling renewable energy projects in commercially feasible ways because investors need incentives to finance these projects. Renewable energy sources are currently far from the required scale to replace hydrocarbons, which will continue to shoulder the bulk of the energy base load. Starving the oil and gas industry of capital will do nothing to help the energy transition but rather limit supplies and exacerbate energy price volatility. It is also important to help governments and industries internalize the understanding that carbon is not free. There is a price for emitting carbon, and that pricing mechanism can take the form of a carbon tax and carbon credits.
Other formidable challenges to the energy transition include a fractured global system and rising geopolitical tensions; the “dirty” business of rare-earth mining, such as nickel and cobalt; and mechanisms to ensure a fair and just energy transition, especially for developing economies.
Driving Innovations in the Global Carbon Credit Market
There are two separate carbon credit markets: compliance and voluntary. The former can be described as the “right to produce carbon,” while the latter concerns more with carbon offsets. There is no global compliance market, whereas the voluntary market is international by design. The voluntary carbon credit market is only 3 billion USD in size today. However, as industry regulations and disclosure requirements evolve, there is potential for significant growth in the coming years and decades.
While most activities occur in the primary market, the secondary market is also currently being developed in partnership with exchanges and clearing houses. Spot and futures markets already exist, and exchange-traded funds (ETFs) invest in carbon credits. However, these products are usually thinly traded at this stage. The demand for offset credits primarily comes from developed markets in Europe, Japan, and the U.S.
By contrast, supplies typically come from projects geographically located in the equator belt – Southeast Asia, for example, accounts for about 1/3 of the supply, i.e., the ability to absorb and trap carbon. Notably, the types and quality of carbon credits vary greatly, which reflect the nature of the underlying projects, such as duration (or how long the carbon can be sequestrated) and social benefits. High-quality carbon credits are scarce. Singapore’s vision for its role in the global carbon credit market covers all the significant aspects, including financing, standards, project development (in neighboring Southeast Asian countries), and market making.
Collaborative Research on Portfolio Liquidity
Liquidity risk can be more dangerous to portfolios than volatility. Extreme liquidity events such as the March 2020 selloff can trigger margin calls, collateral calls, and other unusual liquidity demands. For institutions with periodic liability obligations, such as pension benefit payments, emerging liquidity risk is an ability for plan participants to gain early access to their pension benefits without penalty, partly encouraged by poorly thought-out government policies. Other institutions may have glide path obligations in liability-driven investments (LDIs). Sovereign wealth funds may need to respond to government withdrawal requests on short notice to help fund unplanned spending deficits. For corporate pension plans, in the event of a full or partial pension risk transfer arrangement, the receiving party, often insurance companies, will likely require the delivery of liquid assets rather than illiquid ones.
In more typical scenarios, ample liquidity should be maintained to at least (1) fulfill contractual fee obligations to external fund managers, (2) rebalance portfolios, and (3) facilitate tactical allocations or pursue opportunistic investments. A key reason for reviewing portfolio liquidity is the steady increase in institutional allocations to private assets, which often come with significant lock-up periods. Together with the promise of the illiquidity premium, private assets are also opaque, or data-scarce, compared to their listed market counterparts. It can be hard to accurately model their risk characteristics, let alone integrate their risk metrics into a top-down risk allocation process. An intriguing idea is to add a dedicated person to oversee liquidity across all asset classes – a “Chief Liquidity Officer” (CLO), who may be able to cut across asset class silos and understand the liquidity picture of the organization holistically.
Finally, some argue that regulations should evolve on the subject matter, too, as governments may have to step in during extreme liquidity events to bail out their public sector pension plans.
Global Macro Conditions
There were a few historical moments in foreign exchange and bond markets in the third quarter of 2022. Some were triggered by remarkable events such as the “mini-budget” crisis in the United Kingdom, which ultimately led to the resignation of former prime minister Liz Truss, who was in office for only 45 days. But more importantly, the crisis hit the value of the Pound-Sterling at a time of vulnerability in terms of inflationary pressures. UK government-issued bonds and notes, or the UK gilt market, were also profoundly unsettled, which almost turned into a crisis of its own due to the prevalence of LDIs.
Less dramatic but equally concerning is the steady decline of the value of the Japanese Yen against the U.S. Dollar, which hit its 32-year low (below 150:1) by mid-October. This transpired even as the Japanese Ministry of Finance intervened directly in the foreign exchange markets to help stabilize or slow the decline, which is a sign of extraordinary circumstances. However, it is worth noting that domestic consumer price inflation and wage increases in Japan are somewhat stable, which has allowed the Bank of Japan to remain steadfast with its set of ultra-accommodative monetary policies, at least for the time being.
The third and the primary currency against the U.S. Dollar is the Euro, which has remained below or at par with the dollar since August. The Eurozone’s troubles are exacerbated by a drawn-out Russian invasion of Ukraine going into the winter, which will continue to cap energy supplies in Eurozone economies.
As the global reserve currency, this level of strength of the U.S. Dollar can be destructive to other economies and to international trade, which is settled in U.S. Dollars. However, with U.S. core consumer price index inflation running at 6.6 percent (compared to the long-term average of 3.6 percent), the Federal Reserve, under its dual mandate, has no choice but to continue tightening monetary conditions in the U.S.
Twenty-five years ago, the strong dollar exacerbated the Asian Financial Crisis of 1997. Affected economies in Asia learned their lessons and are now preemptively adjusting their interest rates to fight off the effects of a strong dollar. However, many other emerging market economies have not done so. Accordingly, they suffer from severe consumer price inflation and are on the brink of defaulting on their external debts.
Macro Inflection Points and a New Investment Paradigm
The short term will continue to entail much volatility, perhaps more so than most investment professionals of the current generation are used to. Inflation is structural and very pronounced in many parts of the world. Central banks are attempting to tame inflation by tightening their monetary policies. However, they will likely over-correct or have done so already. The impact of high-interest rates on the housing sector and companies’ ability to service their debts could be understated. Given how highly levered some companies are, a wave of bankruptcies should not surprise.
Recession is almost a certainty. So much so that some asset classes are beginning to price one in while others remain oblivious. Russia’s war in Ukraine and the resulting Western economic sanctions will continue to overshadow Europe. At the same time, China’s political leadership no longer sees economic growth as its top priority, which could stall the world’s growth engine.
When a new investment paradigm is forming, it is tough to establish and maintain long-term views. Long-term mean-reversion only works to the extent that the mean is known or predictable. Bear market rallies can occur on even mediocre news. Still, bad news could result in persistent volatility as prices fall again. Some longer-term forces already in play include climate change, geopolitics, energy security, and demography. However, institutions and investment professionals will need to survive short-term challenges such as liquidity walls and career risks to plan for the long term.