Singapore's Temasek doubles profit, fears contagion

By Saeed Azhar and Kevin Lim

SINGAPORE (Reuters) - Singapore wealth fund Temasek warned of further contagion from the global credit crisis after it doubled its full-year profit by selling billions of dollars of assets.

The fund, which poured more than $5 billion into Merrill Lynch in December, said it saw value in the banking industry, despite the U.S. subprime disaster that has forced banks to write off more than $500 billion.

"The fallout of the credit crisis will continue to dampen the global economy over the next 24 months, with sharply escalated oil and food prices beginning to test inflation expectations," Chairman S. Dhanabalan said in the firm's annual report.

But Temasek sees opportunities in financials and said it would not cap its investments in that sector, which grew to 40 percent of its portfolio in the year to end-March from 38 percent previously.

"The financial service industry is one we believe in," Manish Kejriwal, Temasek's senior managing director for investment, International and India, told reporters at its annual briefing on Tuesday. "It's a proxy to the economic growth."

"We recently concentrated on U.S. and UK primarily because we see value," he added, referring to Temasek's purchase of a 9 percent stake in Merrill Lynch and a 2 percent stake in Barclays last year. It also raised its stake in Standard Chartered to 19 percent from 13 percent.

However, Anshukant Taneja, an analyst who covers Temasek for ratings agency Standard & Poor's, warned the firm's large exposure to financials increased its vulnerability to unpredictable asset cycles and contagion.

"The investment environment is expected to remain challenging, with expectations of continued pressure on liquidity and possibly subdued trends in the equity markets," said Taneja, who rates Temasek 'AAA', the highest credit rating, partly because of its government ownership.

"This may impact Temasek's ability to divest its stake in various entities and manage its portfolio."

The company declined comment when asked whether it wanted to invest in U.S. bank Lehman Brothers, which has been linked in reports to a possible stake sale to other big Asian financial institutions as it seeks to raise money and scale down its more than $60 billion of mortgage-related assets.

Government-owned investment vehicles such as Temasek and its bigger sister agency, Government of Singapore Investment Corp (GIC), control over $2 trillion in assets -- more than the combined value of the main German and Australian stock indexes -- and are expected to grow to $12 trillion by 2015.

AGGRESSIVE EXPANSION

Temasek, whose chief executive Ho Ching is the wife of Prime Minister Lee Hsien Loong, has aggressively expanded outside its Asian home market in recent years to boost returns.

Ho, who keeps a low profile, has a long-term goal to have a third of the firm's assets in Singapore, a third in emerging markets and the rest in developed countries.

Temasek has also increased its stakes in unlisted firms and alternative assets such as private equity, and said it is looking to raise its investments in Latin America and Russia.