The world is in a polycrisis. Markets and societies are straining under the pressure of economic uncertainty, geopolitical instability, climate change, supply chain disruptions and persistent inflation. But while market volatility is a big challenge, it also presents an opportunity for future-focused investors and companies. 

In order to negotiate these complexities, a nuanced, multipronged approach is required, says Rohit Sipahimalani, Chief Investment Officer of the global investment firm Temasek. “Companies and governments can no longer sit on the sidelines. Everyone must play an active role in solving shared global challenges, as businesses cannot succeed unless societies thrive,” he says. “It is crucial to have a viewpoint on what the world will be like in this decade, as it will allow us to be astute in scoping out current and future challenges and opportunities.” 

Temasek has identified six key challenges in the decade ahead for which investors and companies should prepare.

Challenge 1: Persistent economic uncertainty

Persistent inflation, restrictive macroeconomic policies and sluggish growth have left investors worried. Research by the International Monetary Fund (IMF) underscores the potential consequences, including lower consumer spending and reduced business investment. Supply interruptions, pent-up demand and rising commodity prices have driven inflation to a multi-decade high, compelling central banks to act aggressively. IMF estimates indicate a worldwide growth slowdown, highlighting the need for long-term investment to weather short-term economic swings.

“One that can withstand external shocks and perform through market cycles to deliver sustainable returns over the long term” says Sipahimalani.

Despite continuing challenges, the global economy is displaying short-term resilience.

Sipahimalani believes that Temasek’s investment approach can give it an edge in the current volatile environment. “We adopt a long-term view of our investments, which gives us the flexibility to take concentrated positions and invest in all stages of the business life cycle,” he says. “Our long-term performance has surpassed market indices over a 20-year period, and delivered a 9 per cent 20-year return as at 31 March 2023.” 

Challenge 2: Navigating geopolitical turbulence

Global geopolitical turbulence has presented investors and companies with new and complex difficulties. The US–China rivalry has deepened, the Ukraine–Russia war has had a downstream impact on global food and energy security, and the Israel–Hamas conflict will have extensive security and humanitarian consequences across the region. Supply chains are being reconfigured from just-in-time to just-in-case, which will add to inflationary pressure and business costs as economic policies shift to both defensive and offensive strategies. 

The theme of decoupling and derisking is one that investors and businesses will need to track closely to navigate geopolitical challenges effectively. “The flow of human and financial capital is also starting to be restricted, which will have long-lasting effects in key sectors where national security concerns are foremost,” says Sipahimalani. “However, we see opportunities in these challenges as countries and companies invest in alternate supply chains and import substitution takes root in a bid to achieve domestic and regional supply chain security.”

Challenge 3: Managing regulatory hurdles

The International Monetary Fund estimates that trade restrictions arising from foreign investment regimes will lead to global output losses of close to 2 per cent, and this will be felt most acutely by developing economies. “The increasing number, scope and complexity of foreign direct investment (FDI) screening regimes add an additional barrier and uncertainty to the deployment of capital,” says Sipahimalani.

The global foreign direct investment landscape continues to evolve as a growing number of countries adopt measures to protect national assets and critical industries, and governments increase their scrutiny of trade and investment deals. In this climate, Temasek’s approach remains guided by opportunities aligned with the firm’s core investment trends – digitisation, sustainable living, the future of consumption and longer lifespans.

Challenge 4: Climate emergency

Rising greenhouse gas emissions are the primary cause of climate change, which poses serious environmental and economic risks. These risks can affect business operations, supply chains and financial markets. Temasek's response is rooted in sustainability. It has set a target of halving the net carbon emissions attributable to its portfolio in 2010 by the year 2030 and of achieving net zero in its portfolio by 2050. 

“At Temasek, sustainability is at the core of everything we do, from our mandate to deliver sustainable returns over the long term to how we operate as an institution, shape our portfolio and engage our portfolio companies to build sustainable businesses,” says Sipahimalani. “We see our capital playing a catalytic role in accelerating sustainability and decarbonisation solutions, as it can more easily collaborate across borders to create the mass needed to underpin large investments.” 

To improve portfolio resilience and advance towards its sustainability aims, Temasek has put in place a robust ESG assessment process whereby all potential new investments are assessed for their carbon footprint, physical and transition climate risks, and climate impact opportunities from technological advancements. The company also introduced an internal carbon price of $42/tCO2e in 2021 to guide its investment decisions. This was increased to $50/tCO2e in 2023, with plans to double it by the end of the decade.

Challenge 5: Heightened cyber risks

In the digital age, heightened cyber security risks pose a significant challenge. The increasing use of advanced technologies such as 5G, AI and Web 3.0 increases the threat of cyber attacks, which is expected to cost $10.5tn annually by 2025. “Recent cyber security incidents and breaches are a timely reminder that no company is impervious to such attacks,” says Sipahimalani. As technology advances and cyber threats proliferate, Temasek is focused on strengthening the cyber resilience of its portfolio companies. To this end, it set up cybersecurity companies Ensign and ISTARI, which deploy cyber solutions for its ecosystem and beyond.

“Company boards and management should make cyber security a top priority,” says Sipahimalani. “This requires robust governance, compliance and processes to address evolving cyber threats.” Temasek encourages collaboration as a strategic defence. For example, ISTARI, a company founded by Temasek, aims to harness the collective power of the world’s leading cyber security companies, experts and knowledge to work alongside clients on their journey to becoming digitally resilient. 

Challenge 6: Industry and workforce evolution

Industry 4.0 is the next step in manufacturing's digital transformation. McKinsey has reported that when the digital transition is implemented properly it results in 30 to 50 per cent reductions in machine downtime, 10 to 30 per cent increases in throughput, 15 to 30 per cent improvements in labour efficiency and 85 per cent more accurate projections across various sectors. The core components of Industry 4.0 – data and networking, analytics, robots and human–machine interaction – require a qualified and upskilled workforce.

Temasek is getting its workforce future-ready through continual staff learning, and it extends this work to its portfolio companies, helping them prepare to transform their business models by bringing together company, unions and employees to understand and anticipate shifts in relevant sectors. “Through this process, we aim to develop portfolio companies that are nimble and innovative, prepared to face disruption and to take on new opportunities,” says Sipahimalani.