The year 2024 promises many challenges as persistent geopolitical tensions and the trade war between the US and China threaten to keep global markets volatile. This already-complex picture is further muddied by a record-breaking election year, with over 60% of global gross domestic product (GDP) at stake as 76 countries (including the US, the UK, Russia, India and Indonesia), representing over half the world’s population, head to the polls. Adding to that, China is expected to continue to see weak growth due to a vicious multi-year deflationary and deleveraging loop.

Given this backdrop, it is no surprise that Malaysia’s sovereign wealth fund Khazanah Nasional Bhd, despite just having reported that its profits from operations in 2023 more than tripled year on year, is cautious about 2024’s outlook.

The fund made RM5.9 billion in 2023, up from RM1.6 billion - thanks to higher dividends from its investee companies, fair value gains on its market portfolio that made up about 30% of its performance for the year, and capital preservation. Notably, Malaysia Aviation Group, which owns national carrier Malaysia Airlines Bhd, also reported its first annual net profit since 2014, with management guiding that it should not need further capital injections from Khazanah.

“I wish I could tell you that it will be a rosy year, especially after a very bumpy 2023. But there are going to be big shifts, some of which you kind of expect, some not. And we’re all waiting to see what’s going to happen in the US, where inflation tends to be very stubborn. I think people are looking at rate cuts. As for China, it’s going to take a while to recover,” says Khazanah managing director Datuk Amirul Feisal Wan Zahir in an interview.

But there is a bright side, and that is Malaysia’s own economic resilience. Bank Negara Malaysia has projected Malaysia’s GDP growth to come in at 4% to 5% in 2024, driven by continued expansion in domestic demand and an uptick in exports underpinned by an anticipated recovery in global electronics demand.

To help spur and sustain domestic consumption, domestic investments are key. That is where Khazanah plays a crucial role as it strives to fulfil its mandate to drive the nation’s economic growth.

And it sees many opportunities in the country, particularly in how a projected shift in global supply chains - with companies looking to diversify away from China - puts Malaysia, with its established niche in the semiconductor industry for one, in a strong position to reap the benefits.

“This is where we need to focus on investments, and we have a role to play in terms of Domestic Direct Investment (DDI). We have to play it smart, in terms of looking at the major themes that are going to help grow the country,” Amirul says.

A ‘Malaysia Strategy’ withfour focus areas

Therefore, Khazanah has outlined a clear “Malaysia Strategy” for 2024, with four clusters or focus areas:

• Connectivity: To strengthen Malaysia’s position as a regional hub through strategic investments in airports and logistics infrastructure;

• Energy transition: To support the country’s ambitious goal of achieving net-zero emissions by 2050 through investments in renewable energy (RE) and green building projects;

• Digitalisation: To lead the digital transformation of Khazanah’s portfolio companies to enhance their competitiveness; and

• Catalytic/new growth areas: To utilise Khaza­nah’s Dana Impak initiative to foster innovation and drive growth in emerging sectors like the digital economy and start-ups.

“As we have many companies, rather than trying to look at each company on its own, from a Khazanah perspective, we’re now grouping the companies into clusters. When we do that, it allows us to see how we can play more of a role in that sector,” Amirul says.

In short, these clusters will help identify investment gaps that Khazanah can look into or strengthen, which will bolster the overall domestic economy.

“This mission-based approach is set to drive long-term returns and sustainable value for the nation, aligning with the aspirations of Ekonomi Madani,” Amirul says, referring to Prime Minister Datuk Seri Anwar Ibrahim’s vision that is centred on “Raising the Floor” to elevate the quality of life for all Malaysians, and “Raising the Ceiling” to transform the country’s economy and boost its overall competitiveness.

The strategic investments and key initiatives under this “Malaysia Strategy” are in line with the New Industrial Master Plan and the National Energy Transition Roadmap (NETR) to support the transformation of the Malaysian economy.

For example, under the NETR launched in July 2023, Khazanah was named the champion for the renewable energy zone in the country, a task it is undertaking via UEM Lestra Bhd, the green investment arm it set up under its ­wholly-owned UEM Group Bhd.

UEM Lestra has made significant strides in the development of projects across the RE and storage sectors, which Khazanah wants to focus on to accelerate energy transition and decarbonise industrial parks and cities in Malaysia.

A key project that UEM Lestra is developing is a 1GW solar farm, together with an RE industrial park in Johor, as part of the integrated RE Zone flagship catalyst project under the NETR. It is collaborating with Itramas Corp Sdn Bhd - the largest vertically integrated solar plant developer and engineering, procurement, construction and commissioning service provider in the country - on the project, which has also attracted notable foreign investors such as Blueleaf Energy and Itramas’ existing partners, China Machinery Engineering Wuxi Co Ltd and HEXA Renewables.

UEM Lestra has also announced it is partnering with NUR Power Sdn Bhd, the country’s first and only independent power utility that has been granted exclusive rights to sell electricity in the Kulim Hi-Tech Park in Kedah, to develop a 500mw solar plant in the park. In addition, UEM Lestra is working with Enggang Holdings to jointly develop a 170mw solar plant in the Gebeng Industrial Park in Pahang.

Long-term asset allocation strategy still holds

On the prime minister’s recent call to scale up domestic investments to boost Malaysia’s economy, Amirul says a significant portion of Khazanah’s portfolio, over 60%, is already invested in Malaysia and the fund remains committed to actively managing these investments and driving value creation within Malaysian companies. A key priority is Dana Impak, which allocates resources to stimulate new sectors in the digital and start-up ecosystem, while fostering socioeco­nomic resilience and future growth potential, he says (see accompanying story for more on Dana Impak.)

Khazanah understands, however, the need for balance to ensure resilience against an increasingly uncertain and volatile global environment. Indeed, its strong performance last year was due to the fund’s diversified strategy instead of relying on any single part.

So, while maintaining a focus on Malaysian assets, it will continue to spread its portfolio across public and private markets, as well as real assets, to mitigate global risks while making adjustments to ensure it seizes opportunities in the right subsectors and geographies. Each asset class will include a mix of investment strategies to optimize risk adjusted returns.

“Overall, we believe our long-term strategic asset allocation (SAA) still holds, and it is crucial that we execute based on our long-term SAA targets, including through implementing asset class level strategies and securities selection mentioned earlier. We recognise that it is also important to remain nimble and adjust our deployment plans accordingly but, overall, we are a long-term investor guided by our long-term strategy. Our long-term strategy also considers the global megatrends around deglobalisation, digitalisation and climate change, where these themes are embedded in our asset class level strategies, recognising that these megatrends are also ever evolving,” says Amirul.

As for China, he says it remains “a very important market” for Khazanah, even as the fund has had to trim its exposure there last year to go for opportunities it saw in other markets in North Asia. Khazanah, a long-term investor, views China’s underperformance recently as just a small blip, as the country still has vast potential.

“The country advanced very rapidly over the years, so property overheated for them. Therefore, they think they have to slow that down. But they’re pivoting to new innovations, whether it’s energy transition, AI (artificial intelligence) or others. Many companies are doing that there. So, it’s a very interesting market for us and we want to be there early to monitor it.

“At the same time, we see a lot of companies in China that want to look at how they can retain the international exposure they have in the face of these geopolitics and everyone’s talking about ‘China+1’. So, how can we bring about inward investments? We have a strong relationship with China, where lots of value can be gained. It’s a two-way relationship. This is where we’re not your typical fund manager,” Amirul explains.

Thematic real asset diversification andpartnering WITH top PE funds

In its portfolio diversification, real assets, both infrastructure and real estate, are long-term income generators that provide inflation protection. This is where Khazanah actively seeks opportunities in sectors undergoing structural shifts - such as logistics and data centres, which cater for evolving supply chain and consumption patterns - and takes on opportunities in a thematic fashion.

For private equity (PE), which remains a core part of its investment strategy, Khazanah now has a systematic approach of partnering with top PE funds across various strategies - buyout, growth, secondaries and venture capital - to diversify across time horizons and access opportunities. “There is an opportunity for buyout strategies, especially in a rising rate environment where good-quality companies may need credible capital partners to help navigate rising cost and capital structure issues,” says Amirul.

The public equity market presents a complex picture for 2024. With volatile markets and a potentially tight US presidential race, Amirul acknowledges it would be difficult for the fund to end the year above the near record-high starting point that Khazanah set in 2023.

So, what will Khazanah’s net asset value (NAV) growth look like in 2024? The fund’s NAV rose to RM84.8 billion last year after dipping from RM92.2 billion in 2019 to RM79 billion in 2020. The recovery in 2023 puts the overall Khazanah portfolio back on track after a challenging five-year period. From RM33 billion in 2004, its NAV grew at a compound annual growth rate (CAGR) of 5.1% over 19 years.

“I hope the NAV will just grow according to the economy; but it depends. I remember the days when it was easier to tell you, ‘Oh, we’re going to do this or we’re likely to achieve that’. Now, whatever we learnt about economics before, I don’t know whether it still applies, because everything’s changing. It’s not so easy [to predict how things will be] anymore,” Amirul says.

“We have moved on from buying assets and holding on to them, waiting. Now, by clustering our assets, we are more open in terms of looking for new opportunities to invest in, instead of just holding on [for capital gains] or, if that doesn’t work out, divest and diversify. What’s different now is looking at what we do a lot more strategically to deliberately find more opportunities in the country,” he says.

Dana Impak, the social impact investment arm that Khazanah Nasional Bhd set up in 2021 with a RM6 billion allocation to be invested across six themes based on issues and challenges facing the nation (see chart), made significant strides in 2023 to foster innovation and empower Malaysians across various sectors.

A key development is the establishment of the Future Malaysia Programme (FMP), an initiative that aims to support the local start-up ecosystem of entrepreneurs, start-ups, venture capital and corporate venture programmes through collaborations with domestic and international partners.

“Through FMP, we’ve partnered with established venture capital managers, corporate venture programmes and open innovation platforms. We’ve forged key partnerships with leading venture capital firms such as Gobi Partners and 500 Global, leveraging their investment track records and expertise to facilitate the growth of Malaysian companies on an international scale,” says Khazanah managing director Datuk Amirul Feisal Wan Zahir.

He also cites, for example, the fund’s partnership with global innovation platforms such as Plug and Play, and Antler, which provided not only access to a global network of investors and advisers but also opened doors to new opportunities for Malaysian firms.

Together with CGC Digital, the digital arm of Credit Guarantee Corp Malaysia Bhd, Khazanah has also invested in Funding Societies (FS), the largest unified micro, small and medium enterprise (MSME) digital finance platform in Southeast Asia, to broaden financing access to unserved and underserved businesses. Another notable investment Khazanah made was in homegrown insurtech company PolicyStreet to enhance protection for Malaysia’s underserved market, with over 500,000 gig workers and 50,000 SMEs already benefiting from its suite of products and services.

Talent creation was also something Khazanah looked into. Amirul says, “When you have a good investment, money will find it; but we need more of these good investments, so we need more talent.”

Thus, the Future Malaysia Skills (FMS) initiative was launched to drive the continuous development of Malaysians for the future of work by spurring in-demand skills and access to high-quality jobs, which Khazanah believes will in turn spur competitive industries and facilitate more local champions across Dana Impak’s focused themes. “FMS also complements the FMP initiative by generating a talent pipeline that is critical for the local start-up and corporate venture ecosystem.”

It also started backing 42 Malaysia, an innovative peer-to-peer computer science school that charges no tuition fees and has no teachers and no traditional classrooms, to enhance Malaysia’s talent pool. The coding school, with its flagship campus 42 Kuala Lumpur, focuses instead on project-based learning imitating real-world work. Groundwork has now been laid for 42 Malaysia to add new campuses in both Penang and Iskandar Puteri in 2024, with plans for more in other parts of the country in the coming years.

After its survey of smallholders across the country found that one of the biggest problems they faced was climate change, Khazanah threw a challenge to innovators to tackle the climate challenge for Malaysia’s food security via the Khazanah Impact Innovation Challenge 2023. This resulted in allocation of grants of up to RM5 million to the finalists.

“What we did was we identified a problem, and we crowdsourced for ideas so people could innovate, and we gave seed money to the finalists. This allows us to see whether they can go further, whether there are opportunities to invest in them. For example, we have seen ideas to use robotics in oil palm plantations, ideas for alternative meats, and we have had people coming up with black soldier flies as an alternative feed for our poultry and fish, which lessens the dependence on corn as a livestock feed. The question is, how do we make these ideas work? It’s still early days. At the moment, it is about catalysing ideas,” Amirul says.

For 2024, Dana Impak aims to commit an additional RM600 million for Malaysian companies of varying sizes and stages of growth, covering sectors related to electric vehicles, drone technology, agriculture, rural and semi-urban development, social enterprise development and supply chain research.

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