Temasek Holdings Pte said the turmoil in Europe may result in a market slump rivaling the 2008 global financial crisis, creating opportunities for the Singapore state-owned investment company to make deals.
Temasek, which managed S$193 billion ($150 billion) as of March 2011, may fund European companies expanding in growth markets like Asia and Latin America, or form ventures with firms seeking mergers or acquisitions, Chief Investment Officer Tan Chong Lee said in a June 11 interview. Temasek is prepared to make “sizable” deals topping S$1 billion, he said.
The MSCI World Index (MXWO) slumped 9 percent in May, its worst monthly performance in two years, as Europe’s debt crisis intensified, the U.S. recovery showed signs of losing steam and growth slowed in China and India. European officials have tried to contain the situation as Spain sought a bailout of 100 billion euros ($125 billion) for its banks and a Greek vote this weekend may decide whether the country stays in the euro zone.
“We do not discount the possibility that another severe round of major dislocation could actually result from the current European crisis,” said Tan, 50. “It’s hard to quantify or predict the magnitude of the potential correction, but one would imagine that there is no less reason why another major correction would not be as bad or worse than the global financial crisis that we saw back in 2008.”
The European Union’s construct has created “inherent instability” in the system, which is unlikely to improve until structural changes are made, Tan said at Temasek’s headquarters.
Temasek is assessing investment proposals in areas it wants to focus on, such as retail, luxury, technology, health care, biotechnology and insurance, Tan said. These also fit its aim to invest in markets with a rising middle-income population.
“Global markets are going to see a lot of volatility,” said Catherine Yeung, Hong Kong-based investment director at Fidelity Investment Management Ltd., which had $1.62 trillion of total managed assets as of March. “It is important for investors to search for those growth opportunities and many of those growth opportunities lie in Asia Pacific.”
Investments in Europe and North America make up 8 percent of Temasek’s assets, trailing assets in Singapore and other parts of the Asia-Pacific region. Past European investments that exceeded $1 billion include its 2 percent stake in London-based Barclays Plc, which it has sold, and 18 percent of Standard Chartered Plc (STAN), making it the U.K. bank’s biggest shareholder.
Temasek also holds 5.5 percent of Rio Tinto Group’s Ivanhoe Mines Ltd. (IVN), according to a filing last week. The Singapore firm declined to say the amount paid for the stake in the Vancouver- based company, which is worth C$433.9 million ($422 million) as of yesterday’s close.
“In this environment, we’re seeing sizable opportunities come our way and we are carefully evaluating those opportunities,” said Tan, who’s also considering smaller ventures. “We are currently net cash, which means that we have the full flexibility to undertake significant transactions provided it meets our return requirements.”
Temasek’s assets slumped 30 percent to S$130 billion in the year ended March 2009 amid the global financial crisis when it sold its stake in Bank of America Corp. at a loss. The company’s holdings rebounded to S$186 billion the following year, and reached S$193 billion at the end of March 2011, according to Temasek’s annual reports.
Tan was hired in September from Bank of America’s Merrill Lynch unit, where he was the Southeast Asia head of corporate and investment banking. Tan is also Temasek’s co-head of the Americas alongside Boon Sim, who joined as president of North America this month from Credit Suisse Group AG. Sim was global head of mergers and acquisitions at the Swiss bank.
Temasek, which is run by Chief Executive Officer Ho Ching, also hired John Cryan, the former chief financial officer of UBS AG (UBSN), as president for Europe in January.
While Temasek plans to be “naturally cautious” with investments amid the crisis, according to Tan, stock market volatility is holding back others.
CSR Corp., China’s biggest trainmaker by market value, is unlikely to act on proposed acquisitions in Europe this year because of concerns about the region’s economy and the future of its single currency, Chairman Zhao Xiaogang said in a June 8 interview in Beijing.
“We don’t think it’s time to actually enter,” said Kelvin Tay, Singapore-based chief investment officer for the southern Asia Pacific region at the wealth management unit of UBS, which has $580 billion of invested assets as of March. “We are still advocating a cautious stance. It takes years, if not decades for all these issues to be completely resolved,” citing Europe’s competitiveness, trade unions and unemployment.
Barclays Chief Executive Officer Robert Diamond said the euro region will survive even as the debt crisis slows economic growth and weakens the currency.
“The underpinnings of the single currency, the underpinnings of the integrated economy across Europe are very, very strong,” Diamond said in a Bloomberg Television interview in Hong Kong today. “We’re going to continue to see some event risk as we, in our opinion, march toward, over the next couple of years, closer to fiscal and political integration.”
Tan said Temasek’s holdings in financial services companies, which made up 36 percent of its assets as of March 2011, will continue to be an important part of its investments.
“Banks are a very good proxy for riding on the growth of a particular economy or economies,” Tan said. “I don’t see us diminishing or reducing our exposure in the financial services space.”
Temasek made its biggest deal in more than a decade in April with the pending sale of its 67 percent stake in PT Bank Danamon Indonesia to DBS Group Holdings Ltd. (DBS), Southeast Asia’s biggest bank. DBS will pay for Temasek’s stake in the Indonesian bank with $4.9 billion of new stock, increasing its share of the Singapore bank to 40.4 percent from 29.5 percent.
The transaction, also the largest in the region’s banking industry, faces headwinds as Indonesia threatens to restrict foreign ownership of its lenders. Foreigners are currently allowed to own 99 percent of an Indonesian bank.
In China, Temasek sold $2.48 billion of shares in Bank of China Ltd. (3988) and China Construction Bank Corp. (939) in May, less than a month after paying $2.3 billion for shares in Industrial & Commercial Bank of China Ltd. Temasek, which continues to hold more than $17 billion in Chinese bank shares, said the recent sales were part of a “rebalancing” after the investment in ICBC, the world’s biggest bank by market value.
“We continue to believe in the long-term potential of China,” Tan said.
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