When credit was no longer available, many business models collapsed. Heavy losses were passed on to owners and investors. The situation for savings in the Fund is different. We have had to record losses on equity investments and active credit investments. However, the Fund has no traditional liability side and liquidity risk is low. The growing risks in the market did not force us to make changes that would have resulted in huge realised losses for our owners. The final results of our strategies through the troubled waters of the financial crisis cannot be deduced from the quarterly results at the peak of the crisis. Actually, the Fund has spent the last few quarters increasing its ownership in companies worldwide. As for credit, values are not lost as long as borrowers fulfil their obligations. The Fund is prepared to retain ownership of its illiquid investments until they mature in a few years time. Moreover, unless the economic outlook goes from bad to considerably worse, the Fund will record a substantial excess return in years ahead from holding on to assets that the market has priced down due to a collapse in liquidity and fear. In fact, as the global economy seems to be stabilising, this effect is already evident. Let me conclude by underlining the topic of this conference: “Investing for the long run”. The Fund is a long-term savings plan and capable of riding out large swings in the markets. This is the very foundation of the investment strategy.
However, when it comes to the size of financial markets, there are a couple of caveats that I wish to add. First, a larger and deeper financial system may attract increased capital flows, and consequently, lead to increased volatility of the exchange rate. Such volatility can be mitigated if the foreign exchange markets are also deep enough to absorb the variations in the demand and supply of foreign exchange. Exchange rate flexibility is necessary and having a healthy level of foreign exchange rate reserves is also helpful in times when there is significant volatility of capital flows. During the Asian Financial Crisis of 1997–98, net portfolio outflows were RM31 billion. During the 2008–09 financial crisis in the AEs, we experienced almost three times that much outflows without any significant disruption of domestic financial intermediation. The second caveat has to do with the question of whether a financial system can become too big whereby it becomes a drag on the economy. Based on research at the BIS and the IMF, this may indeed be the case. In July 2012, Stephen Cecchetti and Enisse Kharroubi of the BIS published a paper, where based on a study of 50 advanced and emerging countries from 1980–2009, they found that beyond a certain point, further growth of the financial system can actually reduce real growth by reducing productivity growth. Furthermore, a fast growing financial sector can also drag down productivity growth by pulling away scarce resources from the rest of the economy.