20-year Returns Outlook

Economic Scenario-Based Approach

As equity returns are volatile over time, and influenced by macroeconomic or geopolitical events and shocks, T-GEM uses a scenario-based approach to simulate our 20-year long term expected returns. This approach takes into account our views of long term macroeconomic fundamentals over the next 20 years, adjusted for current market valuations.

Projection Based on Economic Fundamentals

In projecting economic fundamentals, we make more granular year-to-year assumptions for the first five years, and transit to more general assumptions based on longer term fundamentals as we go beyond 10 years. This “pathing” approach incorporates assumptions about changes in economic conditions over time. We do not assume an equilibrium return that remains unchanged over the 20-year period, nor do we assume a reversion to the historical mean.

20-year Expected Returns for Different Portfolio Mix

The charts below illustrate the simulated returns for a Global Bond Portfolio, a Global Equity Portfolio and the Temasek Portfolio. The simulations are based on our Central Scenario.

The Global Bond Portfolio has the lowest upside potential, as compared to the Global Equity and Temasek Portfolios. It also has the least volatility, as shown by its narrower year-to-year annual returns distribution curve.

The Temasek Portfolio has the highest upside potential (see blue shaded) at the end of the 20-year period, but also the highest volatility.

20-year Expected Returns for Various Temasek Scenarios

We simulate our 20-year expected returns under different scenarios.

Potential Scenarios for 2020 and Beyond

Potential Scenarios	Description
Central	Our baseline expectations of growth, reflecting our views of the most likely economic pathway. These include near term challenges resulting from the COVID-19 pandemic and also longer term challenges such as climate change.
Differing Climate Change Pathways	The Central Scenario incorporates our assessment of the most likely impact resulting from climate change. However, there is a wide range of possible outcomes, depending on the changing priorities of policymakers around the world and unforeseen changes to the climate in the future. As such, we consider other possible outcomes, including a scenario that assumes greater mitigation efforts that would lead to a slower rise in temperatures (“High Ambition”). We also consider a business as usual scenario where no mitigation efforts are put in place and in turn leads to a steeper rise in temperatures by 2100 (“Low Ambition”).
China Hard Landing	A disorderly and prolonged slowdown in growth may result if reforms prove slow to rebalance the economy and address risks in the financial system and corporate debt-related vulnerabilities. This is a less likely alternate scenario.
Severe Escalation in Trade and Tech Tensions	Significant increase in trade and investment conflicts among major economies and a substantial escalation in barriers to global trade, access to key inputs and technology. This is a less likely alternate scenario.
Secular Stagnation	A scenario where underlying potential growth is much weaker than expected. Together with a lack of policy space, this makes the global economy more susceptible to prolonged downturns, during which rates and returns are lower, for longer periods. This is a less likely alternate scenario.

The T-GEM 20-year returns curves for the Temasek Portfolio are shown below for the Central, Differing Climate Change Pathways, China Hard Landing, Severe Escalation in Trade and Tech Tensions, and Secular Stagnation Scenarios.

Broadly, the Central Scenario offers higher 20-year expected returns for the Temasek Portfolio, compared to those under the other alternate scenarios. The exception to this is the High Ambition Climate Change Scenario, which is expected to deliver the highest expected returns over the long run. However, given the high transition costs to which policymakers would have to commit, this scenario remains unlikely for now.