A cheap play on Asian growth

Cris Sholto Heaton

“Worthwhile Canadian Initiative” is the most boring headline of all time, according to Newsweek magazine. But “Singapore’s budget focuses on productivity” would surely give it a run for its money.

The city-state’s new blueprint for its future isn’t what you’d call a riveting read. And it probably won’t achieve much. It promises S$5bn in government cash to make the economy run more efficiently. But whatever politicians do, Singapore will remain one of the world’s oddest countries.

It’s a strange blend of capitalism and centralised power. The state indirectly accounts for around 60% of GDP. Micro-managed and authoritarian, it’s not somewhere I’d want to live.

But that doesn’t stop it from being a good way to invest in the Asian growth story…

How Singapore grew from nothing

Singapore is one of the world’s best examples of successful development. In 1965, it left (or was expelled, depending on who you listen to) from Malaysia. At the time, it was a poor island with high unemployment and no natural resources. But it has grown to become one of the world’s wealthiest countries. GDP is volatile due to the small size of the economy and its level of dependence on external demand. But it’s grown by an average of 7% a year since 1975 (see chart below).
Singapore GDP, year-on-year percentage change

Singapore GDP, year-on-year % change

The official line is that this is due to good management by Lee Kuan Yew and his People’s Action Party (PAP), which has ruled Singapore since independence. A pro-business, pro-foreign investment strategy has encouraged foreign firms to set up low-cost manufacturing facilities. These have taken advantage of low labour costs to produce goods for export. Improving education and infrastructure allowed the country to move into steadily higher value industries.

But not everyone would put the success down to inspired governance. Geography has played a big part. As a deepwater port on a major trade route, Singapore was always well-placed to benefit from the growth of global trade. And others argue that Singapore’s decision to become a Southeast Asian tax haven has been crucial.

This last allegation doesn’t go down too well with the Singaporean government. Andy Xie, Morgan Stanley’s former chief Asia economist, had to resign after an email in which he said the country’s success “came mainly from being the money-laundering center for corrupt Indonesian businessmen and government officials”. But in private many would agree.

Singapore faces tougher times ahead

Whatever the reason, Singapore has done well. But it faces difficult times ahead. Manufacturing still accounts for around 20% of GDP, compared with around 5% in Hong Kong. But income levels are becoming too high to support this. So it risks losing work to cheaper locations elsewhere in Asia.
Singapore GDP by sector.

Singapore GDP by sector

So the government is trying to refocus the economy. In recent years it has sold state-controlled chipmaker Chartered Semiconductor to Abu Dhabi’s Global Foundries. It has also granted licences for two casinos to Las Vegas Sands and Malaysia’s Genting Group. In short, manufacturing is becoming less of a priority. Now service sectors such as tourism, financial services and medical care are the focus.

There’s also the notion of becoming a regional media hub. But this is unlikely until there’s a dramatic change in freedom of speech. The country’s newspapers – run by government-controlled publishers – are uncontroversial and bland. This is one of Singapore’s big limitations. Although technically a democracy, the PAP has always held complete power. It stifles democratic debate by restricting media exposure and suing opposition politicians whenever they say something unflattering.

Singaporeans tolerated this without much grumbling while they were becoming better off. But today, there’s growing dissatisfaction. Ordinary citizens feel that improvements have come to a halt. Pro-immigration policies have helped the economy grow. But this has mainly benefited the wealthy and the immigrants, who now make up a third of the workforce. For average Singaporeans, wages have stagnated. Meanwhile, competition for housing and other resources has grown.

There’s no chance that the government will lose the next elections. But there’s more opposition. Internet news sites and blogging have helped dissenting opinions spread outside of the state-controlled media. So a significant drop in support is possible, which would be embarrassing.

Hence the new budget. It focuses on trying to raise productivity, and to cut the influx of foreign workers by raising levies on firms that employ them. There were also curbs on property speculation to try to keep the housing market under control.

Singapore’s re-invention won’t be easy – but it doesn’t matter

Singapore has made mistakes in its attempt to push its economy in new directions. Attempts to promote the Singapore exchange to Chinese firms looking for a foreign listing, led to lower standards and a series of scandals, as I discussed here: Why you must tread carefully in emerging markets. The better Chinese firms have listed in Hong Kong and New York and won’t be back.

And the budget’s focus on productivity reinforces one thing. Singapore has failed to produce a single world-beating large company. Its largest government-linked companies (GLCs) are often inefficient and lack innovation. Their existence squeezes smaller, more innovative private-sector rivals. That’s unlikely to change until the politics does, irrespective of how much money is thrown at the problem.

Yet Singapore will continue to prosper. No other country is as well-placed to profit from the success of the rest of Asia. Hong Kong has it beaten as a capital market. But Singapore remains the best-placed financial centre in sectors such as private banking. That puts it in a good position to serve the growing numbers of wealthy businessmen in the area (regardless of the source of that wealth).

Its geographical location will mean it remains a key trade point. Its high development level gives it a headstart in many services such as healthcare. And it could improve regional ties and co-operation to overcome some of its disadvantages. Some manufacturing could shift into Malaysia, or low-cost Vietnam, where it’s a major investor.

The Singapore stockmarket will never be Asia’s most fashionable. It lacks the big picture prospects of China and India. Or even thef development stories of Indonesia and Vietnam. But if you believe that Singapore will grow at a decent pace for as long as the rest of Asia does, it looks relatively cheap. The FT Straits Times Index trades on a 14.5 times forecast earnings and a dividend yield of 3%.

Both the STI and the MSCI Singapore benchmarks are reasonably well-diversified, despite a bias towards sectors such as financials and real estate, rather than consumer-related stocks. A significant number of these firms are GLCs. That’s unavoidable given their dominance in the economy. And while the GLCs aren’t worldbeaters, they’re usually not disastrous either.

Composition of Straits Time Index

In terms of fund choice, there are two exchange-traded funds (ETFs), one for the MSCI Singapore. There’s also a US-listed closed-end fund and a handful of open-ended funds. In general, the actively managed funds hold most of the same core large caps as the ETFs plus a few smaller stocks. As a result, they’ll typically outperform on the way up and underperform on the way down. But none stand out as better bets than an ETF.

Selected Singapore funds

As ever, if you know of a useful fund that’s not on my list, please let me know in the comments

This article was first published at MoneyWeek.