The CEO of Temasek, Singapore’s state-owned investment firm, has expressed concerns about how a weakening US dollar is impacting the appeal of US assets for international investors.
Dilhan Pillay noted that, given Temasek’s global portfolio of S$434 billion (around $333 billion), the company has ramped up its dollar hedging this year due to the dollar’s declining value against other currencies. However, he cautioned that the expenses tied to this hedging are becoming significant.
“The Chinese and Europeans are also hedging,” Pillay said during a Bloomberg event in Singapore on Wednesday. “We’re reaching a stage where hedging might become too costly, leading us to consider natural hedging alternatives.”
What does he mean by “natural hedging”? Well, it refers to seeking investments that can provide the desired returns while factoring in the associated risks. “Some USD-denominated assets simply don’t offer enough net returns that make them worth our investment,” he clarified.
This year, the dollar plunged notably against various currencies like the pound, euro, and Singapore dollar, a trend that began after Donald Trump imposed import tariffs affecting global trade. While losses have been partially offset since then, the pressure persists.
Founded 51 years ago, Temasek was set up to oversee the government’s investment in local firms. Among its major holdings are prominent US companies, including Amazon, BlackRock, Mastercard, Nvidia, and Visa.
Currently, about 24% of Temasek’s portfolio invests in the Americas, a rise from 18% in 2020. Additionally, exposure to the US dollar has grown to 37%, up from 31% five years prior.
In response to the volatility of the US dollar, global investors are increasingly hedging their risks, which is leading to higher costs. Analysts have suggested that the uptick in hedging activity is partly responsible for the dollar’s depreciation.
Despite the escalating costs of hedging, many foreign investors remain willing to absorb these expenses to retain their positions in AI stocks, even amidst growing skepticism regarding inflated valuations.
“When examining public markets, I do see significant risks,” Pillay observed. “It’s fair to describe this as a valuation bubble.”
