(Adds analyst comment, detail)
By Saeed Azhar and Kevin Lim
SINGAPORE, Aug 26 (Reuters) - Singapore wealth fund Temasek [TEM.UL] 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 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.
"This may impact Temasek's ability to divest its stake in various entities and manage its portfolio."
The company declined comment when asked whether it wanted to invest in U.S. bank Lehman Brothers LEH.N, which has been linked in reports to a possible stake sale to other big Asian financial institutions as it seeks to raise money and scale down its more than $60 billion of mortgage-related assets.
Government-owned investment vehicles such as Temasek and its bigger sister agency, Government of Singapore Investment Corp (GIC), control over $2 trillion in assets -- more than the combined value of the main German and Australian stock indexes -- and are expected to grow to $12 trillion by 2015.
Temasek, whose chief executive Ho Ching is the wife of Prime Minister Lee Hsien Loong, has aggressively expanded outside its Asian home market in recent years to boost returns.
Ho, who keeps a low profile, has a long-term goal to have a third of the firm's assets in Singapore, a third in emerging markets and the rest in developed countries.
Temasek has also increased its stakes in unlisted firms and alternative assets such as private equity, and said it is looking to raise its investments in Latin America and Russia.
Annie Koh, a professor of finance at Singapore Management University, said Temasek's move to expand into new markets made sense as the slowdown in the United States has made its way to Europe and will likely spread to Asia.
"If you have sector concentration, you must have market diversification," she said.
Temasek's net profit doubled to S$18.2 billion ($12.8 billion) in the year to end-March, with its portfolio value increasing about 13 percent to S$185 billion, helped by a S$10 billion injection from the government.
The MSCI index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 11.2 percent in the year to end-March, but has dropped almost 16 percent since then through Tuesday, to a 17-month low.
Temasek said it made S$32 billion of new investments in its 2007/08 financial year, double the S$16 billion it spent in the previous year.
Asset sales more than tripled to S$17 billion from S$5 billion a year ago as Temasek sold a power plant in Singapore and cut its stakes in firms such as Bank of China (601988.SS), Singapore Telecommunications (STEL.SI) and Singapore Airlines (SIAL.SI).
Singapore assets accounted for a third of its portfolio at end-March, down from 38 percent the previous year. Asia ex-Japan accounted for 41 percent, up from 40 percent.
For a Temasek FACTBOX, click [ID:nSP132652]
For a related Graphic, click here (Editing by Jan Dahinten & Ian Geoghegan)