Investing in Singapore: Why Your Portfolio Needs This Hot Emerging Market

| About: iShares MSCI (EWS)

By Carl Delfeld

Like two Rolls Royce jet engines smoothly powering a 767 aircraft, the twin economies of Singapore and Malaysia are driving many smart global investors’ portfolios forward. I’ll tackle Malaysia in a future column, but for today, let’s focus on Singapore.

A few quick-fire facts for starters before we get into the investment nitty-gritty:

  • Formerly a British trading colony in 1819, Singapore became an independent republic in 1965, under the leadership of the current prime minister’s father, Lee Kuan Yew.
  • About 275 square miles in size, it’s three times larger than Washington, D.C., but only one-fifth the size of Rhode Island, with a population of around 4.5 million.
  • Despite its small size, though, Singapore consistently punches above its weight in both global commerce and politics. A member of the Association of Southeast Asian Nations (ASEAN), Singapore is home to around 100 commercial banks and is arguably the most strategically important Asian nexus for global trading, finance and services.

In short, Singapore is the “Switzerland of Asia.” And here’s why you should invest in it:

Six Reasons Why You Should Invest in Singapore Over China

There are several compelling reasons to invest in Singapore. But let’s get right down to brass tacks and start with the country’s economy…

  • Economic Growth: You think China is growing fast? Over the first half of 2010, Singapore boasted the world’s fastest-growing economy, with a blistering GDP growth rate of 17.9%. Pretty impressive, given the 6.8% contraction during the fourth quarter of 2009.
  • Resilient Economy: Despite only 1.6% of its land being suitable for agriculture and having to import almost everything, including water, Singapore somehow manages to have a trade surplus. It has a balanced budget and a stable currency and still manages to allocate 5% of its GDP for defense.
  • Well-Diversified: Unlike South Korea and Taiwan, which are heavily dependent on the cyclical electronics industry, Singapore has a well-diversified economy, with 70% of its GDP attributable to finance and services.
  • A Major Transport Hub: Hong Kong and Shanghai will beg to differ, but Singapore has the busiest shipping port in Asia and is situated next to a vital trading channel, the Straits of Malacca.
  • Politics: Singapore uses a parliamentary form of government and an English common-law judicial system. Slowly but surely, a freer political climate is developing, with a Speaker’s Corner instituted in 2000 and the ability to express views freely anywhere, except for two sensitive topics: race and religion.
  • Sensible Regulation: Singapore’s accounting rules and regulations are among the most conservative in the world. For example, its rules on inventory accounting and the expensing of stock options are more conservative than those in the United States.

Additionally, Singapore’s educational performance is legendary. The fact that it has twice as many Internet users as television sets is telling. Its citizens are a diverse lot, too, with 77% Chinese, 14% Malay and 8% Indian, while 42% of its population are foreigners working primarily in services. The country is also corruption and drug-free.

Singapore is also changing with the times…

Rolling the Dice With the Big Boys

If you want to play with the high rollers at the casinos, you can hit hotspots like Las Vegas, Macau or Dubai. But there’s a new player in town…

In an effort to generate more investment, tax revenue and add a bit of swagger, Singapore has launched two large casino resorts – and with remarkable success. The second quarter takings put Singapore on track to have an annual $4 billion casino market, according to The Wall Street Journal. That’s just 20% less than what Las Vegas is expected to do this year.

According to projections, the resorts will lead to $4 billion in investments, $3.5 billion in annual revenue, 35,000 jobs and $350 million per year in taxes and fees.

Mending Fences… and Grabbing China’s Manufacturing

Singapore has also made great strides in patching up misunderstandings with its neighbor to the north, Malaysia, from which it split in 1965. Tax issues, water supply agreements and transportation arrangements are all moving much more smoothly.

Singapore is proving to be equally adept at expanding its manufacturing base. Traditionally, the country has relied on its electronics industry as the backbone of its manufacturing sector. But despite making up 40% of the total manufacturing output, electronics only accounts for 5% of employment. So Singapore is making the transition to more of a service and research and development-based economy.

Not only that, some firms are surprisingly moving their manufacturing centers from China to Singapore, due to Singapore’s infrastructure, logistics and laws protecting intellectual property. Exxon-Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A) and Sumitomo (OTCPK:SSUMY) are all expanding their petrochemical facilities.

In addition, strong global demand for transportation, communications and logistics services, plus increasing information technology spending, rising consumer spending and property prices and expanded tourism all point toward continued growth.

Get Smart and Start Investing in Singapore

An easy and smart way to invest in Singapore is through the iShares MSCI Singapore Index (NYSEARCA:EWS), which tracks the Singapore Straits stock index. The EWS highlights:

  • It’s up 28.4% over the past year and 18.7% year-to-date.
  • Its largest positions are in Singapore Telecom (OTCPK:SGAPY), United Overseas Bank (OTCPK:UOVEY) and DBS Bank (OTCPK:DBSDY).
  • It’s tax-efficient and has an annual expense ratio of only 0.59%.
  • It’s trading at 14 times projected earnings. By comparison, the Switzerland market and its ETF – the iShares MSCI Switzerland Index (NYSEARCA:EWL) – is trading at 18 times earnings.

Singapore is the epitome of quality and is finding creative ways to boost its economic growth. It’s an attractive, top-drawer play on Asian growth and should be a core holding for any global portfolio.

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