- Singapore is showing signs that its extraordinary growth of recent years may be reaching an end as it reaches its 50th birthday.
- Sri Lanka is putting in place a strong foundation upon which rapid economic growth can be achieved.
- 2 island nations with strategic locations and significant Chinese investment but high economic growth is more likely in Sri Lanka over coming years than in Singapore.
Why on earth should any sensible investor consider such a trade recommendation? Singapore is a modern peaceful country envied internationally for many areas from finance to education to logistics. Sri Lanka known chiefly for cricket, tea and a horrid civil war! Surely comparing these countries is like comparing apples and oranges?
Let's go back to 1956 when the father of Singapore, Lee Kwan Yew first visited Colombo, the capital of Sri Lanka. A mere 9 years before Singapore independence, LKY stated that Singapore should aspire to being like Colombo. It had 2 universities, foreign exchange reserves, a strategically critical location and enviable infrastructure owing to its position as a key Allied HQ during the war compared to Singapore which had been occupied by the Japanese.
Step forward to today and it is Singapore that has the foreign exchange reserves, amazing infrastructure, world renowned education and it is Sri Lanka that is recovering from a period of war, a civil war between the Sinhalese majority and the Tamil minority located in the North of the island.
However, as any sensible investor knows, in deploying capital, it is not the past that is important, but the future. As Singapore reaches the ripe old age of 50 next year, it seems likely to be Sri Lanka's turn to produce the economic growth over the next 50 years that Singapore has produced since independence in 1965.
Singapore - Short term weakness or Long-term decline?
In 2015, Singapore will celebrate its 50th birthday unsure whether it is about to endure a major political upheaval. The general election of 2016 has the potential to rock the People's Action Party ('PAP'), the party of Lee Kwan Yew that has dominated Singaporean politics since 1965. The last general election in 2011 saw the party lose a General Representation Constituency ('GRC') for the first time (to the Workers Party). A GRC is a larger constituency that elects a slate of MPs from the same party. Moreover, the PAP overall share of the vote fell to just over 60%.
This was generally viewed as a wake up warning for the PAP, but since then, there are many signs that discontent in the country has increased and economic factors are contributing to build further discontent. Questions are being whispered as to whether a bigger political avalanche could be coming at the next general election in 2016.
1. Singapore is now the most expensive city in the world. According to the Economist Intelligence Unit, the cost of living in Singapore has soared. This is felt on a daily basis by locals and expats alike who are paying more for every day expenses from food to travel.
2. Singapore is increasingly crowded. The population has increased from 3 million in 1990 to its current level of nearly 5.5 million. During that time, the number of foreign permanent residents has increased from 112,000 to 531,000 and the number of foreign employees on a temporary work visa from 311,000 to over 1.5 million.
3. Car ownership in Singapore is now exclusively a luxury. The complex system of ownership now means that if you can afford a car, you may as well buy a luxury car. In 1990, there were 5 times as many small (under 1,600 cc) cars available for sale as larger ones. Today, bigger cars dominate. The largest selling car brand in Singapore in the first quarter this year was Mercedes Benz with BMW at #3.
These factors are contributing to a sense of resentment that ordinary Singaporeans are no longer being placed first by the Government. This is undoubtedly the most common coffee shop conversation in the city at the moment. However, it is not just locals that are suffering.
4. Foreign businesses and business people are leaving Singapore. Despite official statistics, expats in Singapore will assure you that people are leaving Singapore at a much higher rate than ever before. The evidence comes from their professional lives but more importantly from their children's schools and social activities that are experiencing unparalleled turnover. One relocation agency reports a 3-fold increase in business supporting departing families in June 2014 compared to June 2013. There is also plenty of anecdotal evidence that foreign companies are struggling to attract senior foreign talent to locate in Singapore.
The real estate market, a key barometer of sentiment across Asia, is also showing concerning signs.
5. Housing rental yields are collapsing. Whilst official figures point to a 'softening', the specific evidence is of rentals being offered 30-50% lower than 2 years ago.
6. House prices are falling. Official figures show 3 consecutive quarters of decline. So far in 014, prices have fallen 1.1% in Q2, and 1.3% in Q1. Whilst not dramatic, once again, specific evidence is that sellers that need to sell are having to accept much more dramatic reductions and even new condos are being offered at discounts in excess of 10%.
7. The 'Chinese factor' of buying properties for investment but leaving them empty is resulting in a large stock of housing that lies empty. This is all potential supply that still has to be launched into a declining rental or sale market.
This last point about the 'Chinese Factor' is a key issue. In the past, expat talent was largely productive, attracted by jobs or the opportunity to build businesses in a key economic hub. This lay at the heart of Singapore Government Policy. Such expats are being replaced by mainland Chinese investors whose primary focus is moving portfolio investment offshore and hence is less accretive to the economy.
8. Volume on the Singapore Stock Exchange has collapsed to around $1 billion, over 40% down year on year and Moody's continues to warn of pressure on the credit ratings of Singapore banks.
So the big question is whether Singapore has reached the peak of its potential, at least for the time being? Has being declared the most expensive city in the world heralded a 'top' for Singapore that is now about to be followed by a period of consolidation or even decline. It is this correspondent's belief that the growth story of Singapore has ended and investors need to look for its successor. The answer seems to lie across the Indian Ocean in a country that showed such promise 50 years ago.
Sri Lanka - The New Island of Growth?
Sri Lanka's nickname is the 'Teardrop Isle'. For many years, this was appropriate not just because of its shape, but also because of the tears shed during a brutal civil war that lasted from 1983 to 2009. However, over the past 5 years, a transformation has taken place around a country which promises so much.
1. Sri Lanka occupies a strategic location adjacent to the main East-West sea lane. Literally every oil tanker and container vessel travelling from Europe and the Middle East to East Asia (and back) has to pass within a few kilometres south of Sri Lanka. The country is planning to take advantage of this strategic location by expanding its Southern Port at Hanbantota and at the capital city of Colombo.
2. The country has built new expressways linking Colombo with the key tourist destinations of the South and on to Hanbantota as well as with the international airport. Further expressways are planned linking Colombo with the North and East.
3. Power generation has been expanded with the building of 2 coal powered stations (900 MW in total) and a 150MW hydro project.
4. Over 450 acres of land is being reclaimed from the sea adjacent to downtown Colombo to created 'Colombo Port City' in a $15 billion project.
5. The enormous tourism potential of the country is being supported by new hotel. Amongst international brands opening in Sri Lanka Shangri-La Hotels are building 2 hotels totaling 800 rooms, Hyatt is opening a 550 room hotel, Marriott is building a 200 room hotel and Crown Casino will open a 450 room integrated resort (another 800 room casino linked resort being built by John Keels). However, this is only a small portion of the expansion of Sri Lanka's tourism sector which counts local and regional brands as well as a wealth of boutique and villa hotels.
Tourist numbers are increasing by over 20% per annum and the national airline has recently joined the One World Alliance. The international airport at Colombo is being upgraded and a new international gateway in the South of the island was recently opened.
6. Sri Lanka is the world's second largest tea exporter and the fourth largest producer of tea. However, a lack of branding has left profits lying in international hands. Moreover, its variety of climates from the tropical coasts to the cooler highlands permits many other agricultural products to be grown.
7. Sri Lanka enjoys a wealth of natural resources. Minerals include mineral sands deposits of the North and some of the best large flake graphite so critical for the new super nano-material known as graphene to a multitude of gems, most notably sapphires which are reputed to have the best colour and clarity of any found in the world. A Sri Lanka Sapphire was featured in Kate Middleton engagement ring that was previously owned by Princess Diana.
8. Sri Lanka has identified offshore resources of oil and gas which is now attracting interest from exploration and production companies.
9. Whilst the low paying garment and textile industries remain strong in Sri Lanka, the higher value software and business processing industries are expanding strongly with export revenues in this area up from $213 million in 2007 to $600 million in 2013 and having a target of $2 billion by 2030.
Whilst the potential of the country is clearly high, it may come as a surprise that so much has been achieved in such a short period of time since the end of the civil war? The answer is the China Factor! Whilst Chinese investment may be one of the factors now hurting Singapore, it has certainly propelled Sri Lanka and looks destined to continue to support the island's expansion.
China recognised the strategic importance of Sri Lanka and has been the largest investor in its infrastructure expansion. Of course, this has led to tension with India, for whom Chinese influence is less attractive. However, the Sri Lankan Government of President Rajapaksa has embraced Chinese investment whilst trying to reassure India that its intentions are not inconsistent with maintaining close links to its neighbour. It isn't just money that is flowing from China either, tourists from China increased 137% in the first half of 2014 to over 52,000.
Trading the Divergence
Despite the collapse in trading volumes, the Singapore Stock Exchange still dwarfs the Colombo Stock Exchange which only has daily trading volume of around $8 million covering 293 listed companies. Foreign exchange controls still make Sri Lanka a tougher place to deploy capital than the laissez faire environment of Singapore, but foreign investors remain the key factor in the local stock market being net buyers of Rupee 5.2 billion (US$40 million) of stocks. However, this remains a 'frontier market' for share investors.
A number of fund management houses offer Sri Lankan country funds. Perhaps ironically, the largest fund is registered with the Singapore Monetary Authority. However, individual stocks listed overseas that offer access to Sri Lankan expansion are currently almost non-existent. An ETF doesn't currently exist though some Sri Lankan exposure is available in the iShares MSCI Frontier 100 (NYSEARCA:FM) (though heavily diluted by other countries).
From this perspective, portfolio investment into Sri Lanka remains challenging for many. However, as awareness of the country's potential and indeed its actual current growth expands, it is likely that the direct investment in real estate, the strategic investment in tourism, energy, agriculture and minerals and other private equity investments will be joined by internationally listed opportunities for international investors to participate.
Singapore's reputation for its rule of law and fairness will not be matched by Sri Lanka for many years to come. Many will also be concerned by continuing investigations into the approach taken by the Sri Lankan government in ending the Civil War and by allegations of corruption within the country.
However, the question has to be posed. If the past 50 years belonged to Singapore will the next 50 years belong to Sri Lanka? At least today, it seems likely that at least for the next few years, the growth opportunities are more likely to lie in the Indian Ocean than in the South China Sea.