GIC Thinks Returns Will Be Lower In The Next Decade: Should Investors Worry?

GIC Pte Ltd, which is one of our Singapore government’s investment arms and one of the largest sovereign wealth funds in the world today with assets of US$344 billion, warned investors yesterday that returns going forward may well be lower.

According to The Straits Times, GIC’s chief investment officer Lim Chow Kiat had cautioned at a press briefing on Wednesday:

“Going forward, we see a more difficult investment environment, largely because the broad market valuations are high. It’s not simply because markets have gone up, but also because fundamentals in many markets have not kept pace with their rising prices… We see that as posing difficulty in the next five to 10 years in terms of market returns.”

It’s a very fair warning with the world grappling with a host of financial and economic problems. Dominating the headlines currently include the slowing economic expansion in China, vicious swings in its stock market, the mess in Europe and Greece, persistently low oil prices, and interest rates that are near generational lows.

Couple these with historically high valuations in the U.S.’s stock market, and it appears reasonable, at the very least, for investors to proceed with caution or even be pessimistic about the future investing outlook over the next decade.

But amidst all that gloom, here’s something interesting we should note. The 1990s and early 2000s were a wonderful time for the U.S. economy and stock market. From 1992 to 2000, U.S.’s gross domestic product per capita grew more than 40% while the S&P 500 (a broad market index in the U.S. akin to the Straits Times Index (SGX: ^STI) we have here in Singapore) leapt by 216%.

Do you know how Americans felt back in 1992? Here’s what former U.S. President Bill Clinton had to say about it in 2000:

“Eight years ago, it was not so clear to most Americans there would be much to celebrate in the year 2000. Then our nation was gripped by economic distress, social decline, political gridlock. The title of a best-selling book asked: “America: What Went Wrong?””

Apparently, the pervasive feeling then was one of how bad the world (or at least the U.S.) had looked. Even powerful money managers felt the same way too. Here’s a snippet from a 1992 publication that contained Ray Dalio’s thoughts about the stock market and investing at that time:

“Over the long term, both Dalio and Jones agree, as a result of these circumstances bonds in the nineties will almost certainly outperform stocks. In the fifties, says Dalio, wary investors were still looking in the rearview mirror at the Depression of the thirties, when stocks took the shellacking of all time.

Thus, bonds remained the preferred investment when the environment of accelerating growth and inflation actually favored stocks. As a result, those who took what appeared to be a risk and bought stocks in the fifties wound up making fortunes, while those who bought bonds wound up eventually losing their shirts.

Now, says Dalio, the situation is precisely reversed. Investors in the nineties remain traumatized over the carnage that inflation and sky-high interest rates wreaked in the bond market in the seventies, so they’re investing in stocks instead. Unfortunately, says Dalio, the current economic climate of low inflation and historically slow growth means that bonds will actually prove to be the better long-term performers.”

Dalio’s the founder and head of Bridgewater Associates, an investment firm which today manages assets of around US$160 billion. He’s also a very well-respected voice in the financial world when it comes to investing matters because of his accomplishments.

But, Dalio was bearish on stocks in 1992 partly as a result of an expectation for slow economic growth. He turned out to be wrong on both counts.

This isn’t meant to be a criticism of Dalio. Growth was indeed slow at that time. But, the advent of the internet in the mid- to late-1990s – something which nobody could predict – had helped spark a massive boom in the U.S. economy and financial markets. The S&P 500 had more than doubled even if we were to compare its trough in 2002 (after the dotcom bubble had burst) with where it was at the start of 1992.

The point of bringing all these history up is to let them be a reminder that innovation and growth can still happen at times when things look dark and bleak. GIC may turn out to be right a decade from now with its caution that investors today should expect lower returns over the next 5 to 10 years.

But there may be as-yet-unforeseen innovations – like how the internet happened in the 1990s – which can help the world move onto a new phase of growth. This is why – despite the real risk of facing lower returns – we shouldn’t flee from investing. Running away will mean that we are giving up the chance to participate in the wonders of human ingenuity and the benefits it may bring.

There’s no guarantee that breakthrough innovations or developments will happen. But it hasn’t paid for anyone so far to bet against humanity’s long-term progress toward a better tomorrow.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.