U.S. exceptionalism, artificial intelligence and China’s economy are three areas that investors will need to grapple with in the years ahead, according to Singapore sovereign wealth fund GIC, and the world’s largest hedge fund, Bridgewater Associates.
The sovereign wealth fund, which does not disclose assets but is estimated to have about $770 billion, and the $108 billion hedge fund manager collaborated on joint research projects to identify and assess the issues they think will be most important for investors in the coming years. The work was part of the 30th anniversary of the relationship between the two entities, according to Bridgewater’s website.
The U.S.’s exceptionalism should be split into economic and asset performance, said Jeffrey Jaensubhakij, group CIO at GIC, in a recorded discussion of the research published on both Bridgewater and GIC's websites.
The economic factors are probably “structural and don’t change,” Jaensubhakij said, with a large domestic market for growth in terms of resources, size of land mass and population. That means “companies and businesses that grow in the U.S. actually can grow to a huge size, achieve great economies of scale, just in the domestic market without having to do anything internationally.”
The U.S.’s diverse population also fosters new ideas and innovation, he said.
Other areas of the U.S.’s exceptionalism are cyclical, such as the joint research showing that valuations have “really grown well beyond those of other countries, and well beyond the fundamentals, the earnings growth and so on.” There’s also still an additional valuation premium given to the U.S., Jaensubhakij said.
"These things historically have been quite cyclical, so it would not be surprising to see some of the exceptional performance on the asset price level actually erode over the next decade or so,” he added.
Liew Tzu Mi, GIC’s fixed-income and multiasset CIO, and chair of the sustainability committee, said fiscal sustainability is also a key concern for the U.S. and other countries, and the question is what politicians will do to address it.
Regarding AI, “I think that the bubble’s ahead of us, not behind us,” said Greg Jensen, co-CIO at Bridgewater, in the same discussion. “I know it seems like there’s been a lot priced in, there’s a lot of euphoria around a lot of these things,” he said, adding that certain companies recognize the risk of not investing in advancements. “If you don’t stay ahead in AI, you’re done for,” Jensen said. Looking ahead, “many companies across many sectors will feel that if they don’t do that, they will fall behind — and that will radically change the investment thinking.”
In terms of potential future investment opportunities related to AI, GIC highlighted companies that can adapt large language models to their own businesses and what they're trying to do.
On China, the trio discussed changing demographics and how the impact of deleveraging in the real estate market, for example, are having significant effects on the economy. Real estate was 26% of gross domestic product in 2020 — that figure was 17% as of 2023, Liew said. “And the property market also has very large knock-on impacts in terms of the credit chain,” she said, such as in consumption and demand for commodities. “This structural adjustment is going to take some time, because it’s very difficult to find something like a real estate contribution that can replace in terms of (a) growth engine for the Chinese economy in a short period of time,” she added.
Finally, the trio discussed sustainability, with GIC’s Liew explaining that, using the MSCI All-Country World index as a proxy for the global investment universe, the “green bucket” — sustainable assets — constitutes about 7% of assets and is where GIC wants to put capital for developments. Stranded or high-carbon-intensity assets account for about 10% of the index — “but, by the way, they are responsible for something like 40% of the whole index WACI” — or weighted-average carbon intensity. GIC will choose to divest if no transition is planned.
Everything in the middle, 83%, is the “transition,” where “the work is quite complex because it’s very nuanced,” Liew said.
