Temasek Review 2018

12-month Returns Outlook

We run Monte Carlo simulations of our portfolio to give us a sense of the likelihood of the range of returns in the coming 12 months.

Applied to our current Temasek portfolio mix, our simulation shows a five-in-six chance that our one-year portfolio returns may range from -17% to +24%. Actual annual returns range over -30% to +43% during the last decade.

In the chart below, the Monte Carlo simulation curves represent the likelihood of one-year returns for some recent financial years. Narrower curves mean less volatility compared to the flatter curves of the 2008/09 Global Financial Crisis (GFC) years.

(as at 31 March)

Simulation of 12-month Forward Portfolio Returns

Volatility of Returns

A wider simulated range means a more volatile outlook.

As expected given our portfolio concentration in equities, our analysis implies that in any given year, our net portfolio value may see a once-in-20-years swing of as much as 30% to 40%. We saw moves of a similar magnitude during the GFC, when our net portfolio value fell 30% in one year, only to rebound 43% the next year.

While the global backdrop continues to be supportive of earnings growth, a number of key risks remain on the horizon. These include risks of overheating economies leading to a faster deterioration in the growth-inflation trade-off, synchronised central bank tightening in developed markets, as well as heightened geopolitical risks, including US trade politics. Depending on the outcome of these events, a quick escalation in risk and a consequent downturn in equity markets is a possible scenario. We remain vigilant and take a proactive approach to managing these risks.

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