While the global recovery has sent most equity markets higher over the last year, it has boosted some economies far more than others. The latest reminder of the growth gap between the developed and emerging economies of the world comes from Singapore, where the central bank recently began an aggressive monetary tightening policy. Usually such a move would spur a selling spree. But the cause of the tightening in this case was cause for jubilation among investors.
Singapore’s GDP climbed 32.1% in the first quarter from the previous three months in annualized, adjusted terms, exceeding even the most aggressive analyst forecasts. A survey of economists indicated an expected expansion of about 20%, with the high end of the range at 28%. The first quarter was the largest expansion on record, and solidifies both Singapore’s place as one of the world’s fastest growing economies and established Asia as the unquestioned driver of global growth (see Five ETFs For An Asia-Centric World and a list of all Asia Pacific Equity ETFs).
Singapore becomes the latest Asian economy to begin unwinding stimulus plans put in place in recent years, a step still far off in the U.S., western Europe, and other developed countries. Australia, Malaysia, and India have all raised interest rates, while China has begun taking actions to drain excess liquidity from the markets. In addition to bumping the range of expected GDP growth to 7%-9% from 4.5%-6.5%, Singapore also boosted the inflation forecast. Inflation is now expected to come in between 2.5% and 3.5% for the year.
The government is taking a pro-active approach to combating inflation. “The force of the Monetary Authority of Singapore’s tightening was unprecedented,” writes P.R. Venkat. “It revalued upward its targeted trading band for the Singapore dollar—its main policy lever—and shifted its stance to a ‘modest and gradual appreciation’ from zero appreciation of the local currency.” Venkat notes that historically policy moves have included one or the other, but never a simultaneous shift in the center and slope of the trading band for the country’s currency.
Singapore ETF In Focus
The iShares MSCI Singapore Index Fund (EWS) surged after the release of the impressive GDP data, climbing nearly 4% in Wednesday morning trading. EWS tracks the performance of the MSCI Singapore Index, a benchmark that includes about 30 of the larges publicly-traded Singaporean stocks. The fund is tilted heavily towards the financial sector, reflecting Singapore’s status as a financial capital of Asia. Financials make up nearly 50% of EWS, with the industrials and telecom sectors accounting for another 35% of assets.
EWS has endured a rocky start to 2010, sinking more than 10% in the first five weeks of the year as worries about the impact of tightening in China weighed on Asian equities. But then EWS went on a tear, and is now up more than 7% on the year. For more actionable ETF ideas, sign up for our free ETF newsletter.
Author's Disclosure: no positions at time of writing.