Investing in Singapore
Stock-Markets / Singapore Oct 10, 2007 - 12:07 AM
Tony Sagami writes: I'm frequently asked what my favorite part of Asia is.
For tourism, I have a hard time answering. I love the history and charm of Beijing … the natural beauty of Taiwan's mountains and beaches … the vibrant bustle of Shanghai … the stunning views of Hong Kong's Victoria Harbor … and the colorful culture of Thailand.
However, from a business and investment perspective, Singapore offers an unmatched combination of modern comforts, sophistication, cleanliness, and an energetic enthusiasm for commerce.
Those values are precisely why Singapore's GDP is surging, and why its major index, the Singapore Strait Times index, is up 38.8% so far this year!
In a moment, I'll tell you how you can get a stake in this great country. First, I want to explain why Singapore has been — and will continue to be — such a wonderful place for making money …
Singapore's Shining Past And Even Brighter Future
For centuries, traders traveling between the Indian Ocean and South China have sailed through the Straits of Singapore. Its unique position as one of the primary commercial gateways to Asia makes it a key crossroad for global trade.
By the late 1800s, three developments had turned Singapore into one of the most important ports of call in the world:
- The advent of the steamship
- The opening of the Suez Canal in 1869
- And the widespread adoption of rubber
Explaining how each of these factors bolstered Singapore's position is a whole story in and of itself. But suffice it to say that by the close of the 19th century, Singapore was enjoying unprecedented prosperity.
The next major stepping stone came in 1965, when Singapore, by mutual agreement, separated from Malaysia. Its new status as an independent republic only furthered its powerful growth, which continues to this day.
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| Is it a coincidence that Singapore's Fountain of Wealth is the largest fountain in the world? |
With a population of about 4.6 million, the country generates $44,600 in per-capita gross domestic product. That's the third highest in Asia, behind only Hong Kong and Japan. Singapore also has a sky-high literacy rate of 95%, and the highest standard of living in Asia.
The World Bank calls Singapore, "the world's easiest place to do business." The country has gotten that moniker by concentrating its manufacturing base on industries like financial services, biomedical research, technology and oil refining.
American Express, AIG, Boeing, Cargill, Dell, Exxon Mobil, Ford, General Electric, Hewlett-Packard, Merck … they all have significant operations in Singapore.
Simply put, Singapore is an economic juggernaut:
- GDP expanded more than 7.9% in 2006
- Inflation is very low — around 0.7%
- The unemployment rate is an enviable 2.8%
- It has the largest current-account surplus (28.5%), as a percentage of GDP in Asia
- And its budget surplus is equal to 6% of GDP
No wonder the Singapore Strait Times index, which tracks the country's stocks, has risen almost 40% this year!
How Can You Profit from Singapore's Strength?
What are exchange-traded funds (ETFs)? ETFs track indexes but trade like individual stocks. They have several advantages over mutual funds: Advantage #1: ETFs can be bought and sold throughout the trading day. Advantage #2: Investors have the option to either buy or sell short ETFs, and even use margin (borrowed money) if they so desire. Advantage #3 : Management fees and expenses tend to be relatively low. Advantage #4: ETFs are often tax efficient and usually pay out lower distributions than mutual funds. Advantage #5: They give international investors the ability to get diversified stakes in individual countries. |
One way to profit from Singapore's growth is through an exchange-traded fund (ETF) that is specifically indexed to Singapore.
One choice: the iShares MSCI Singapore Index (NYSE: EWS).
This ETF is essentially the Singaporian equivalent of the Dow Jones index. I say that because it is a basket of the largest publicly-traded blue chips in the country.
Looking a little deeper into the ETF also reveals something else that's very interesting: Although EWS contains 43 stocks, 70% of its portfolio is concentrated in its top 10 holdings. And those top 10 holdings are heavily weighted to financial and banking shares.
In fact, three of EWS' biggest constituents are financial companies:
United Overseas Bank (11.27% as of 8/31/2007) is a one-stop shop for the wealthy. It offers private banking, trust services, venture capital investment, merchant banking, brokerage services, insurance, fund management, derivatives and precious-metals trading, along with life insurance.
DBS Group Holdings (9.98%) is the largest bank in Singapore. It provides mortgage financing, funds management and brokerage services. It is also Singapore's primary dealer of the country's government securities.
Oversea-Chinese Banking Corporation (9.35%) provides banking, brokerage, corporate banking, asset management, venture capital, and trustee services.
Now given the recent credit crunch, you might be wondering if a heavy financial weighting is a bad thing. In the case of Singapore, I think it's actually a good thing. Here's why …
Singapore is rapidly becoming the Switzerland of Asia!
Singapore's private banks currently manage about $200 billion, or 5% of the world's wealth. What's more, they have been growing by 20% a year.
FACT: Credit Suisse recently moved its world private banking headquarters from Zurich to Singapore.
It sure doesn't hurt that Singapore is close to India and China, the two fastest-growing economies in Asia. However, the real attraction to investors is that Singapore levies NO TAXES on capital gains!
Money is pouring into Singapore so rapidly that there is an acute shortage of private bankers. The business-friendly Singaporean government came up with a solution: In 2004, it funded the establishment of a Master of Science in private banking at Singapore Management University (SMU)!
The privacy laws in Singapore are also very strict. Divulging private financial information is now punishable by a fine of up to $78,000 and a prison sentence of three years.
That secrecy isn't lost on the newly minted multi-millionaires in China. Think about it: Would you keep all your wealth in China, which is still controlled by the Communist Party?
Get this: foreigners may apply for permanent residency if they deposit at least $5 million (Singapore dollars) into a financial institution overseen by the Monetary Authority of Singapore. The Singaporean government is in essence, selling citizenship to the very rich.
It's also worth pointing out that the EWS is yielding about 2.3% because that heavy financial weighting means dividends galore.
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
52.7% |
-26.3% |
-20.9% |
-14.4% |
43.3% |
24.2% |
14.2% |
48.7% |
| iShares MSCI Singapore Index Return, Source Thomson 9/30/07 | |||||||
Now, I'm not suggesting that you rush out and buy immediately. In fact, I think you're better off waiting for the next pullback or until I return from my next trip there. Who knows what individual companies I might find?
But I do want you to realize that China is not the only story in Asia. There are plenty of other booming countries worthy of your attention.
Best wishes,
by Tony Sagami
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