TEMASEK DIVESTS BANK OF AMERICA HOLDINGS, CHANGES STRATEGY

UNCLAS SINGAPORE 000477 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN EINV ECON SN SUBJECT: TEMASEK DIVESTS BANK OF AMERICA HOLDINGS, CHANGES STRATEGY REF: SINGAPORE 131 ¶1. (SBU) Summary: Singapore sovereign wealth fund Temasek Holdings confirmed it sold its entire 3.8 percent stake in Bank of America at what appears to be a substantial loss, ending its foray into U.S. financial sector investments. The sale comes only two years after Temasek's original entry into the U.S. financial sector, despite the fund's stated policy of holding investments for the long term. Temasek's losses on its original US$5.1 billion investment are estimated between US$2.3 to $4.6 billion. Temasek's CEO also announced a revision of its investment strategy, placing more focus on investments in Asia and emerging markets and less on developed countries. End Summary. ¶2. (SBU) A spokesperson for Temasek Holdings, one of Singapore's two sovereign wealth funds, confirmed May 15 that the investment vehicle had divested its 3.8 percent stake in Bank of America during the first quarter of 2009. As a result Temasek no longer has any large-scale direct U.S. financial sector holdings, but continues to have both direct and indirect non-financial sector holdings in the United States. Temasek did not publicly disclose the sale at the time, and divestment was revealed only when press noted that a filing with the U.S. Securities and Exchange Commission indicated Temasek's portfolio no longer included Bank of America shares. Temasek's holding in the bank originated as a 2007 purchase of a 13.7 percent stake in Merrill Lynch, which was then bought out by Bank of America last year. Buy High, Sell Low -------------- ¶3. (SBU) Temasek declined to disclose the sale price on its Bank of America shares, but it is apparent that the sale incurred a substantial loss. Noting that the sale took place during the first quarter when Bank of America shares fluctuated between $14.81 and $2.53 a share, analysts estimate the losses on the sale between US$2.3 and $4.6 billion from the original $5.1 billion investment in Merrill Lynch. Given that the share price averaged below $7 for most of the quarter, the losses are likely nearer the downward side of the estimate. The loss comes on the heels of Temasek's announcement in February that its portfolio had lost 31 percent of its value between March and November 2008, and has likely fallen further since. After the announcement, Temasek was roundly criticized for the substantial losses it had taken for Singapore's fiscal reserves (see reftel). Critics attacked the timing of the Bank of America sale as well, noting that the share price surged from $7 to nearly $12 since March 31. ¶4. (SBU) Given Temasek's policy of holding investments for the long-term, critics wondered why the fund was so quick to sell its shares near what seemed to be the bottom of the market. Temasek has not publicly given its reasons, but Straits Times editor Ignacius Low speculated that Temasek was fearful that the bank was in danger of becoming nationalized and decided to cut its losses, no matter how painful the loss. Local analysts also said U.S. bank earning outlooks were still rather grim and share prices could continue to fall further than their first quarter lows. Temasek Shifts View to Asia, Emerging Markets -------------- ¶5. (SBU) The sale also fits in with a new investment strategy that will focus Temasek's US$87 billion in investments more in Asia and away from the developed world. In a May 12 speech, outgoing Temasek CEO Ho Ching said the company would move toward a 10-20-30-40 portfolio mix, with 40 percent invested in the rest of Asia (excluding Japan),30 percent in Singapore, 20 percent in the developed countries of the OECD and 10 percent in emerging markets. Temasek's previous target was an equal split between Singapore, Asia and OECD countries. The practical effect of the new strategy will be a shift from investments in developed countries to emerging markets. Temasek has been overweight on the rest of Asia for the past two years, and its Singapore investments already stand at approximately 30 percent. Analysts said Temasek would be focusing more on Asia, particularly China, as it sees this region driving future global growth. Temasek made a push in this direction last week as it raised its stake in China Construction Bank, buying shares sold, ironically, by Bank of America. SHIELDS