Can Anything Stop The Singapore ETF (EWS)?

by on July 22, 2010 | ETFs Mentioned:

Most western nations have been treading water over the past few months as debt burdens and elevated unemployment continue to weigh on both North America and Europe. Meanwhile, growth has been much more robust in both developed and emerging markets in the Asia Pacific region. These countries have mounted a swift and strong recovery from the recent financial crisis; many central banks in the region have been forced to raise rates in order to cool down overheating economies. While some advanced economies–such as Hong Kong and Australia–have weathered the storm relatively well, one developed market in the region has let them all in the dust. The tiny city-state of Singapore has reported unparalleled levels of growth so far in 2010, including annualized gains of 26% in the second quarter and mind-boggling growth of 45.9% in the first quarter. These reports have prompted many analysts to boost their projections for GDP growth in the nation, and make some bold predictions as well [see Singapore ETF Surges On Unprecedented GDP Growth]. Credit Suisse and Oversea-Chinese Banking Corp. now predict the island may overtake China as Asia’s fastest-growing economy in 2010. This is especially amazing when one considers that Singapore is a developed nation and has a per-capita GDP of over $35,000; growing such a high number is much more difficult than achieving similar growth in a developing market such as China (which has a per-capita GDP equal to one-tenth of Singapore). “Singapore has unique growth characteristics of its own as a function of having some new areas of growth,” said Manraj Sekhon, the head of international equities at Henderson Global Investors Ltd.

Below, we profile a few key reasons for this amazing growth, as well as highlighting some potential hurdles facing the Singaporean economy ETF options for accessing the economy [also see Looking For Consumers? ETFs TO Play Millionaire-Heavy Countries].

Growth Drivers

  1. Tourism: While Singapore makes for a great business destination due to its prime location, it used to be severely lacking in terms of entertainment. But that is no longer the case, thanks to the opening of two casinos in the city (including one right next to downtown) and a new Universal Studios theme park–the only one of its kind in Southeast Asia. Some analysts believe that these new developments may add a full point of growth to 2010 GDP growth; they have already attracted about 3.5 million visitors since opening earlier this year.
  2. Financial Hub: Many banks set up operations in Singapore to take advantage of the low tax rate and educated workforce. The Singaporean legal system doesn’t hurt either; in a recent report the country ranked in the top ten in the world for strength of investor protection, legal rights, and financial market sophistication, making the city-state an easy choice for many banking companies seeking to establish a Southeast Asia hub [also see Five ETFs For An Asia-Centric World].
  3. Manufacturing Center: Singapore’s manufacturing output jumped 45% in the first five months of 2010 thanks to increased investment from large pharmaceutical companies such as Sanofi Aventis, Pfizer, and Roche. These companies were lured to the region by government policies that include tax breaks, special research and development facilities, as well as worker training programs and one of the busiest ports in the world. Pharma exports doubled every month for three straight months in the first half of the year, suggesting that this sector is becoming an increasingly important part of the Singaporean economy.

Can Anything Stop Singapore?

Despite all of these positives, a few key issues remain as significant risks that could cool Singapore’s red hot economy.

  1. Debt: Some may regard the nation as extremely fiscally sound given the low level of external debt. However, Singapore is heavily indebted in terms of public debt owed by the government. This figure is now above 110% of GDP (on par with Greece), suggesting that the country may have to trim its public spending in the near future.
  2. Asia Slowdown: Although the small nation trades with a variety of countries and maintains good trade relations with all of the Southeast Asian countries, Singapore remains very dependent on developing Asian countries for its exports. Besides the U.S., which is the third largest export destination, the rest of Singapore’s top four trading partners are Asian nations, including neighbors Malaysia and Indonesia, Hong Kong, and China (which takes 9.7% of the nation’s exports).
  3. Oil: Although its neighbors are rich in natural resources, Singapore is not been quite so lucky, importing most basic materials from other countries. The country gets the vast majority of its food from Malaysia and Australia and must import all of its oil as well. Should oil prices spike in the near future, Singapore will be among the hardest hit countries [see Data Weighs On Singapore ETF].

Way To Invest: EWS

The best option to access the dynamic Singaporean market is the iShares MSCI Singapore Index Fund (EWS), an ETF that tracks the MSCI Singapore Index. The fund is very heavy in both large caps and banking firms; large and giant caps make up just over 90% of the fund’s total assets, while financials account for the largest sector allocation at about 55%. Other big sector weightings include industrial materials (12%), telecommunications (12%), and consumer goods (11%). EWS holds 33 securities in total, with its top individual weightings going to United Overseas Bank (12%), Singapore Telecoms (11%), and DBS Group (11%) [see more holdings of EWS here]. The fund is up more than 20% over the past 52 weeks, and has gained about 3% so far in 2010. If Singapore can continue its amazing growth, EWS could soar higher in the very near future [for more on investing in Singapore, see this report on investing in the Lion City].

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Disclosure: No positions at time of writing