Singapore is often regarded as a bell weather for the global economy. A “canary” of sorts, when global trade starts to decline, Singapore’s economy often contracts sharply. During the 2008 Financial Crisis, for example, Singapore’s economy contracted by nearly 13 percent. And yet while indicators across the world point to a slowing global economy, Singapore Straits times Index is up nearly 10 percent over the course of the last week.

Still, the bad economic news from around the world appears to be catching up as the Singapore Straits times Index slipped by nearly a percentage point on Friday.

Singapore Straits times Index

Singapore Straits Times Index a Look

How is Singapore holding strong while the rest of the world slips underneath a bevy of bad news in the United States and China? The Singapore Straits times Index is heavily dominated by banks and other financial companies which have been posting stronger than expected earnings. These stocks have propelled the otherwise sluggish Singapore Straits times Index forward to heights not seen since 2007, before the onset of the continuing global financial crisis.

Potential investors should be cautioned however, as the Singaporean government is projecting weak economic growth, likely to fall between 1 to 3 percent for the year. Through the first quarter the economy actually contracted by 1.4 percent amid falling demand from Western markets and declining orders from China. Further, as the global economy slows, Singapore  (as well the Singapore Straits times Index) will feel the pressure.

The country’s advanced manufacturing sector and shipping industry stand to suffer the most. With a small domestic market of only 5 million people, the city-state has to rely on export demand to fuel growth and provide employment.

If a full blown financial crisis rears its head, Singapore’s financial sector, one of the largest in the world, could also be hit hard. Finally, the government has been working feverishly to deflate housing prices which could suppress the real-estate and construction.

Singaporeans themselves may be able to avoid the brunt of any recession or global slow down as companies are reluctant to lay off staff in a country that regularly enjoys an unemployment rate of less than 2 percent. Still, investors around the world should monitor the city-state closely, as it may offer a glimpse into future developments.

Still, Singapore may offer investors a way to diversify their portfolio. The government has proven to be extremely adept at managing the economy. The city-state rose from a poor backwater port dependent on British patronage at independence in 1963 to become one of the world’s richest cities. Singaporeans now enjoy a per capita income of 51,000 dollars and the city’s 5 million people are mostly middle and upper middle class consumers.

Many global corporations now base their regional headquarters in the city-state due to its low taxes and world class infrastructure. Further, Singapore’s government-linked companies, such as Singapore Airlines Ltd. (SGX:C6L) and the DBS Bank, have proven to be highly competitive in the global economy. Should the stock market decline in coming months, these companies could be attractive investments when the markets bottom out.

The country may see choppy waters ahead and investors should expect short-term losses as the global economy slows. As stock prices drop, however, investors should closely consider investments in government-linked companies and other regional firms. These companies are not as dependent on global economy growth and in the past Singapore’s stock markets have traditionally rebounded quickly and with force.

The Singaporean government has also proven time and time again that it is an excellent caretaker of the nation’s economy and willing to take the necessary steps to ensure economic progress.