The Singapore Story: No Longer A Sure Thing For Investors?

| About: iShares MSCI (EWS)

Lee Kuan Yew, the controversial founding father of Singapore, may have summed up his country's history best when he entitled his memoirs From Third World to First: The Singapore Story. However, there is more than one version of the Singapore story - something investors in the iShares MSCI Singapore Index Fund ETF (NYSEARCA:EWS), the iShares MSCI Singapore Small Cap Index Fund (NYSEARCA:EWSS) and The Singapore Fund (NYSE:SGF), the main investment options American investors have for investing in Singapore or in the Southeast Asian equities listed there, need to be aware of.

These other versions of the Singapore story includes one that says the country was destined to succeed in the past simply because of its strategic location, deep water port and "one degree more" efficiency in an otherwise bad neighborhood filled with mismanagement, corruption and political uncertainty. Then there is a recently written post (or rather a lengthy rant) which has attracted wide attention online because it was written by an anonymous European working in Singapore and he or she goes into considerable detail to describe so-called "Singaporean retardation" or "stupidity." Finally, Singaporeans themselves are growing increasingly restless over their country's high cost of living, the presence of large numbers of foreign workers and corruption scandals - which could spell trouble for the long-ruling People's Action Party (PAP) in the 2016 general elections and impact the iShares MSCI Singapore Index Fund ETF, the iShares MSCI Singapore Small Cap Index Fund and The Singapore Fund.

The Singapore Story: More Than One Version to Consider

While Lee Kuan Yew probably wants you to think of his version of the Singapore story as being one where he moved his country from the third world to the first world, most westerners tend to think of the Singapore story as being about a place where you can't chew gum (not exactly true), there are fines for not flushing toilets and you can be caned for graffiti or other crimes.

However, there is also the Singapore story told by Joe Studwell in his book Asian Godfathers: Money and Power in Hong Kong and Southeast Asia. Studwell's book is not exactly a flattering portrait of the region as he pointed out that Hong Kong and Southeast Asia are home to some five hundred million people and yet their economies are dominated by about fifty families of mostly Chinese ancestry. But when it comes to both Hong Kong and Singapore, Studwell gave this rather keen observation worth considering before you invest anywhere the region:

Hong Kong and Singapore were destined to succeed. All they had to do was to be one degree more efficient, one degree more attractive to capital than surrounding countries and they would prosper. Smallness would be a virtue…A city state with a strategic deep water port in a region that has relatively higher levels of mismanagement, corruption and political uncertainty will prosper with little reference to official economic philosophy.

In other words, Singapore could have gone the laissez-faire Hong Kong route (e.g. no fines for not flushing toilets and hands off on the economy) rather than the more statism route (e.g. fines for flushing toilets and careful government economic planning) and still have been an automatic success. Studwell's points are also well worth considering when you think about other countries in Southeast Asia and all of their problems (see some of my Singapore CBDprevious Seeking Alpha articles about them here) plus Singapore has a mostly ethnic Chinese population while perhaps the shrewdest and largely unplanned move made by Lee Kuan Yew in his version of the Singapore story was to get his country kicked out of Malaysia (or rather the Malay Federation) back in the 1960s and forced to go it alone.

Meanwhile and for a far more entertaining and blunt Singapore story, a post entitled "i dun unerstan u lah!: An exposé of Singapore and Singaporean retardation" written by an anonymous European business person living in Singapore is a must read for would-be investors and anyone considering moving there because the first paragraph contains the following observation:

When I arrived in Singapore I was absolutely shocked at the almost unimaginable retardation of the local Singaporeans. Given that Singapore is one of the wealthiest countries in the world and apparently has the highest number of millionaires per capita, I was expecting to find a Mecca of high technology and efficiency but I was sorely disappointed. It's true the center of the city is full of modern looking buildings and is very clean but aside from that Singapore has much more in common with "third world" countries than it does with it's very "first world" image.

If that sounds bad, the post gets much worse because after a lengthy diatribe about trying to find and hire qualified local Singaporeans as employees, "anonymous" makes the following observations:

I talk a lot about the stupidity of Singaporeans because it's so severe and so obvious, but to add insult to injury I think there is a significant component of laziness too. I believe one of the most prominent causes of this is the Singaporean government because Singaporeans are really coddled and taken care of by their government.


A huge portion of Singapore's wealthy citizens are just "right place right time" real estate millionaires rather than some kind of entrepreneurial geniuses, a situation which is exacerbated by the fact that the government only allows citizens to buy the best of the best properties which is just another subsidy that allows them to be both lazy and stupid while still reaping huge rewards.

"Anonymous" even included a bullet point list of what he or she described as a "very incomplete list of other examples of 'Singaporean retardation.'"

Obviously such a harshly written post or rant has triggered a considerable debate on various online forums (see the following forum links where the post is so far being discussed: The Temasek Review, TR Emeritus, The Real Singapore, Singapore Expats Forum, My [Overpriced] Car Forum, Channel News Asia Forum and Asia One Forums) with many accusing "anonymous" of simply being a racist throwback from colonial days. Nevertheless, the post and some of the forum discussions about it are an entertaining and very enlightening read - even if you have never visited or have lived in Singapore to form your own opinion of the place.

The New 7th Storey HotelFinally, let me mention my own Singapore story which is much more innocuous as it can be summed up by the story of The New 7th Storey Hotel - a hotel which might be fondly remembered by old Asia hands, traders and backpackers alike. When The New 7th Storey Hotel was built in 1953, it was a five star hotel with panoramic views of the beach and a top floor that was the site of cha cha parties thrown by post-war British officers. The hotel was also sort of a city landmark because it reminded locals of the leaning tower of Pisa because it sat on a raft foundation which had settled. However and by the time I stayed there on my first trip to Singapore in early 2002, it was a cheap backpacker hotel convenient to the central business district that was surrounded by reclaimed land and highway flyovers.

Some years later around 2008/2009, the government of Singapore forced The New 7th Storey Hotel to close and despite a public and media outcry, it was demolished to make way for a new subway station and subway line. According to the government, The New 7th Storey Hotel was not an iconic building and had no conservation status - meaning it was not worth their effort to save or work around. Besides, The New 7th Storey Hotel stood in the way of the SingaporeThe New 7th Storey Hotel government's plan which was to build a new subway line and subway station on the spot the hotel stood and absolutely nothing, no protest or public outcry, was going to stand in the way of achieving that vision.

I should also mention that on a later trip to Singapore when I could not get a room at The New 7th Storey Hotel, I booked a few nights at a hostel which I was told was a short walk from the MRT station in nearby Geylang. Unfortunately, I arrived on one of those after midnight flights and was forced to take a cab whose driver dropped me off at the wrong MRT station in Geylang.

While walking around that night looking for my accommodation, I quickly learned there was another side of the Singapore story, which Lee Kuan Yew might not want you to see or know about (but Studwell's book touched on) because in the land of restrictions on gum chewing, fines for not flushing toilets and canings for graffiti, there is a very active red light district that's seemingly well tolerated by Singapore's otherwise no nonsense authorities.

Is the Future of the Singapore Story for Investors Uncertain?

There are signs the Singapore story may not be as certain anymore - something you need to consider before you invest in the iShares MSCI Singapore Index Fund ETF, the iShares MSCI Singapore Small Cap Index Fund or The Singapore Fund.

That's because beyond the glitzy new casinos, the wealthy expatriate investment bankers and any Facebook co-founders trying to escape US taxation; Singapore, at its heart and core, is a Chinese city state with a large Chinese working class and lower middle class population who are increasingly unhappy about their country's high cost of living (which is also being blamed on a big influx of foreigners and foreign workers).Universal Studios Singapore

In fact, a recent CNBC article entitled A Wealthy Nation That Can't Afford to Retire mentioned a just released HSBC study (part of its Future of Retirement program) which found that the annual household income required to lead a "comfortable" retired life in Singapore is now the third highest in Asia (behind Australia and Hong Kong) at $48,773 - a figure that's 68% higher than what was needed in 2011. Another recent CNBC article (entitled Singapore's High Cost of Living May Come at a Cost) noted that foreigners now make up about 38% of Singapore's population (up from about 25% in 2000), the government expects the total population could rise from a current 5.3 million people to almost 7 million by 2030 and property prices surged 50% between 2007 and 2011 in part due to foreign buying.

However, it's not just Singaporeans who are griping about the high cost of living as I'm hearing expatriates too complaining about it instead of first complaining about how boring Singapore is (which is what everyone used to complain about first in the past...) and I know some companies are increasingly looking at other less expensive options in the region for setting up their regional headquarters or they are quietly moving employees or jobs out of Singapore to less expensive locations (Note: The anonymous author of the earlier mentioned rant intends to do just that and also complained that "locals often aren't employable" and cost too much to hire compared with foreigners).

This is in contrast to the not so distant past (circa before the financial crisis) when employers in Singapore (especially those in the IT sector) would bring over lots of employees from neighboring countries, make them sign long-term contracts that were difficult to get out of, work them long hours and pay them less than S$3,000 a month when (as a Filipino friend of mine who found himself in such a situation told me) you can't hope to live remotely comfortable on less than S$3,000 a month as a foreigner in Singapore (or three times what IT professionals from neighboring countries like the Philippines were making back home at the time).

Meanwhile and as locals complain about the increasing presence of foreigners, the employment pass (EP) and permanent residency (PR) situation is starting to irk foreigners as I have heard complaints about the seeming lack of transparency when it comes to the issuing of both e.g. one foreigner has complained to me about not knowing why one expatriate gets PR after one year and another can't seem to get it even after ten years of living and working in the country. He is also concerned about his own status not being renewed because he works in the banking sector and apparently the government wants to encourage the employment of more locals in the sector.

The problem for him and for other expatriates is that having permanent residency for a country which prides itself on offering stability is neither permanent nor stable for many professionals as there is a Re-Entry Permit (REP) which needs to be periodically renewed. If you have PR but leave Singapore without a valid Re-Entry Permit Marina Bay Sands Singapore(REP), you will come back with no status to reside or work in the country at all.

What's more, a foreigner who loses his or her job in Singapore will probably be given six months to a year to find another one before being asked to leave. The problem is that Singapore has gotten so expensive, most professional level expatriates would burn through their savings or severance packages long before the six months or year is up - meaning most expatriates professionals in a position to negotiate a salary package to move to Singapore would be wise to demand some kind of severance deal to cover housing deposits and other matters like relocation home (further driving up costs for employers).

And while Singapore citizenship is no doubt an attractive option to Indian, Filipino and other "third world" nationals, having to renounce other citizenships means Singaporean citizenship is only attractive to Brazil born Facebook co-founder types trying to escape the USA's worldwide taxation policy and not to the citizens of other developed countries which don't have taxation policies hitting their expatriate citizens (and if you refuse an "offer" or "invitation" to apply for Singaporean citizenship, I've heard your PR is not likely to be renewed and you are in danger of not getting a new employment pass either). Moreover and in the past (at least based on anecdotes I've heard), those "third world" nationals who did obtain Singaporean citizenship tended to just use it as a stepping stone to make it easier to migrate to a western country.

Finally, investors in the iShares MSCI Singapore Index Fund ETF, the iShares MSCI Singapore Small Cap Index Fund and The Singapore Fund need to consider the political situation in Singapore. Certainly it's probably much better than the political situation in just about every other Southeast Asian country, but the People's Action Party (PAP) has ruled the country with a super-majority in parliament since 1959.

However and in the 2011 Singapore general election, PAP won 81 of the 87 constituency elected seats (99 total) in parliament and received 60.14% of the total votes cast - its worst performance since independence.

Map of the PAP

Then earlier this year in a by-election in Punggol East won by PAP in 2011 with 54% of the vote but vacant after its representative, who was the speaker of parliament, quit in December over an extramarital affair, was lost to the opposition with 54.5% of the vote going to the Workers Party of Singapore and 43.7% of the vote going to PAP.

Combine the poor election results with the earlier problems I mentioned along with other recent scandals which have tarnished Singapore's otherwise squeaky clean reputation (e.g. the arrest of the civil defense chief and the head of the police anti-drug unit on corruption charges), PAP clearly needs to shore up support by doing more for Singaporean voters.

But should investors in the iShares MSCI Singapore Index Fund ETF, the iShares MSCI Singapore Small Cap Index Fund and The Singapore Fund really be worried about an opposition party with the very socialistic name like the Workers Party of Singapore gaining more power? While Workers Party candidates wear a uniform of light blue shirts to represent links with the city state's blue collar workers, a vote for the party is probably more or less a vote against PAP and the Lee Kuan Yew dynasty (as his son Lee Hsien Loong is the country's current prime minister) rather than a vote against the free market.

Nevertheless, investors should also watch the upcoming elections in Malaysia (see my recent article: The Malay Dilemma: Is Malaysia A Safe Emerging Market Investment?) where Barisan Nasional (BN), the coalition of political parties that's been in power there for 54+ years, is facing its toughest challenge yet from a three party opposition alliance. Should the opposition in Malaysia gain additional seats (after preventing BN from having a super-majority in parliament for the first time in the 2008 elections) or even take power (considered unlikely by most observers), it could embolden Singaporeans to seriously consider alternatives to PAP rule in the 2016 elections.

Singapore ETF and Closed End Fund Analysis

With the above Singapore stories and the country's problems in mind, let's take a closer look at the major Singapore ETFs and closed end fund investment options.

The iShares MSCI Singapore Index Fund ETF was created in March 1996 to track and replicate the performance of the MSCI Singapore Index and had an expense ratio of 0.51% at the end of last year. At the end of the first quarter, the iShares MSCI Singapore Index Fund ETF (according to the iShares website) had a year to date return of 2.96%, a one-year return of 12.57%, a three-year return of 10.83%, a five-year return of 5.87% and a 3.65% return since inception (no doubt due to the Asian financial crisis and the 2008 global financial meltdown which also hit Singapore hard).

As of April 5th, the iShares MSCI Singapore Index Fund ETF had a market cap of $1.60 billion and an average daily trading volume of around 436k shares while as of April 4th, 50.02% of the ETF's holdings were in financials, 23.54% were in industrials, 12.13% were in telecommunications, 9.23% were in consumer discretionary and 4.95% were in consumer staples. The iShares MSCI Singapore Index Fund ETF's top 10 holdings were the following stocks:

The iShares MSCI Singapore Index Fund ETF's Holdings as of 4/4/2013

Holding Sector Weight
Singapore Telecommunications Ltd Telecom Services 11.12%
DBS Group Holdings Ltd Financials 11.09%
Oversea-Chinese Banking Corp (OCBC) Financials 10.52%
United Overseas Bank Ltd Financials 9.80%
Keppel Corp Ltd Industrials 6.53%
CapitaLand Ltd Financials 3.46%
Genting Singapore PLC Consumer Discretionary 3.43%
Fraser and Neave Ltd Industrials 3.32%
Jardine Cycle & Carriage Ltd Consumer Discretionary 2.98%
Singapore Press Holdings Ltd Consumer Discretionary 2.81%

It should be noted that most of the above stocks hardly confine their activities to Singapore where their headquarters are located as they would have operations or investments spread across Southeast Asia. In other words, the iShares MSCI Singapore Index Fund ETF is more of a bet on the entire Southeast Asia and not just Singapore alone.

Meanwhile, the iShares MSCI Singapore Small Cap Index Fund (which does not seem to have an entry on Google Finance) was created in January 2012 to track and replicate the performance of the MSCI Singapore Small Cap Index and comes with a 0.59% expense ratio. At the end of the first quarter, the iShares MSCI Singapore Small Cap Index Fund (according to the iShares website) had a year to date return of 6.64%, a one-year return of 30.40% and a 40.59% return since inception - rather impressive.

As of April 5th, the iShares MSCI Singapore Small Cap Index Fund had a market cap of around $9.5 million and an average daily trading volume of 9,734 shares over the past three months while as of April 4th, 51.26% of the ETF's holdings were in financials and 17.5% were in industrial shares with remaining sectors all having single digit representation. The iShares MSCI Singapore Small Cap Index Fund's top 10 holdings were the following stocks:

The MSCI Singapore Small Cap Index Fund's Holdings as of 4/4/2013

Holding Sector Weight
Suntec REIT Financials 8.49%
Venture Corp Ltd IT 4.59%
Singapore Airport Terminal Services Ltd (SATS) Industrials 4.52%
Singapore Post Ltd Industrials 4.31%
Mapletree Industrial Trust Financials 3.81%
Mapletree Logistics Trust Financials 3.80%
Mapletree Commercial Trust Financials 3.25%
CDL Hospitality Trusts Financials 3.23%
Keppel REIT Financials 2.89%
Ezion Holdings Ltd Energy 2.84%

Unfortunately, iShares does not separate real estate stocks from financial stocks when it classifies sectors and it's clear from looking at the top 10 holdings of the iShares MSCI Singapore Small Cap Index Fund that it's heavily invested in the Singaporean or Southeast Asian / Oceania real estate markets (e.g. Keppel REIT owns nine buildings in Singapore, Brisbane and Sydney).

On the closed end fund side, The Singapore Fund was created by Aberdeen at the end of July 1990 to invest in Singaporean equities and to a lesser degree, invest in equities issued by companies in Association of Southeast Asian Nations (ASEAN) countries. As of April 5th, The Singapore Fund had a 1% return since the start of the year, an 11.8% return over the past year, a 3.42% loss over the past five years and a 192.34% return over ten years according to Google Finance while the fund's Morningstar Factsheet gives it a 244.66% return since inception:

As of April 5th, The Singapore Fund had a market cap of $141.15 million, a 10.78% discount (as of April 4th), an expense ratio of 1.65% (as of the end of January) and had an average daily trading volume of 16,148 shares over the past 30 days. At the end of January, 46.8% of The Singapore Fund's holdings were in financials and 36.6% were in industrials with five other sectors combined accounting for 15.5% of the fund's holdings. The Singapore Fund's top 10 holdings included the following stocks:

The Singapore Fund's Holdings as of January 31, 2013

Holdings Weight
Oversea-Chinese Banking Corp (OCBC) 9.6%
United Overseas Bank Ltd 8.5%
Jardine Matheson Holdings Ltd 8.1%
Keppel Corp Ltd 6.9%
City Developments Ltd 5.2%
DBS Group Holdings Ltd 5.1%
Singapore Technologies Engineering Ltd 4.8%
Singapore Telecommunications Ltd 4.1%
Wheelock Properties Singapore Ltd 3.7%
SembCorp Marine 3.6%

Finally, here is a quick visual comparison of the long-term performance of all three Singapore "focused" funds:

Chart foriShares MSCI Singapore Index (<a href=

Plus a look at the shorter-term performance of all three investments:

Chart foriShares MSCI Singapore Index

The Singapore Story: Some Final Thoughts

So which Singapore story should investors believe and what will be the story moving forward? That's hard to say right now and it should not be assumed that Singapore will always be destined to succeed by being better than its neighbors. Nevertheless, the People's Action Party (PAP) has until 2016 to change or tinker with the narrative to make it better for voters and investors alike.

For investors, it appears the iShares MSCI Singapore Index Fund ETF has performed slightly better than The Singapore Fund for the near term (probably in part due to having a lower expense ratio) while both would have good exposure to the rest of Southeast Asia thanks to their holdings have operations or investments throughout the region. However, the more lightly traded iShares MSCI Singapore Small Cap Index Fund should be considered the more riskier way to invest in the Singapore story, but even its holdings would have decent exposure to the rest of Southeast Asia.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.