Temasek worried about crisis as profit doubles

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 (2.7 billion pounds) into Merrill Lynch MER.N 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 (BARC.L) last year. It also raised its stake in Standard Chartered (STAN.L) 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.