Southeast Asian economies, once a hot-destination for foreign investors, witnessed a rough patch after the taper-talk was set in motion. Slow growth in some of the key economies and the healing U.S. economy led to a sell-off in these markets.
However, the scenario seems to be turning around with a few economies in the region regaining some of the lost momentum. It is especially true for Singapore – the business center of Southeast Asia – which barely avoided recession last year and recorded 1.3% growth (read: Singapore Dollar ETF in Focus: Can It Rebound?).
Lifted Growth Outlook
To reflect better-than-anticipated manufacturing and service sector data as well as overall growth in Q3, Singapore raised its GDP growth forecast for 2013 to 3.5%?4.0% from the previously guided range of 2.5% to 3.5%.
Singaporean economy grew an impressive 5.8% year over year in Q3, maintaining the trend of 4.4% growth logged in Q2. The GDP data in Q3 was also above the forecasted 5.1%.
Notably, the Singaporean government upgraded the growth outlook from 1–3% to 2.5%–3.5% for this year in September, following robust second quarter results. Successive raise in growth guidance surely inspire optimism around this island nation.
Visible revival in global markets helped boost the Singaporean manufacturing data while domestic demand was also pretty strong thus giving an impetus to the service and construction sector.
Cyclical sectors like financials and retail gained the most in the third quarter. Rising exports helped Singapore to record a trade surplus of 6.69 billion SGD in October, almost double year over year (see all the Asia Pacific Developed ETFs here).
The Ministry of Trade and Industry (MTI) expects this boom to continue in the fourth quarter as well. The economy is now expected to expand 2.0?4.0% in 2014 in anticipation of a slothful U.S. and Eurozone next year.
Also, continuing structural reforms in China and fiscal consolidation in some ASEAN economies might restrict export demand in 2014, thus impelling the MTI to have a moderate view on 2014 growth.
Market Impact
Given this slow-but-steady scenario, Singapore emerges as a preferred location for investment as far as South-East Asian investing is concerned. With a current account surplus at around 18.60% of GDP (in 2012), strong growth and foreign exchange reserves at about 337 SGD billion (in October 2013), the country is poised to remain afloat even in the long run.
Both the funds covering this economy’s equity market – iShares MSCI Singapore ETF (EWS) and iShares MSCI Singapore Small Cap Index Fund (EWSS) – have had a bad stretch so far this year falling a respective 0.66% and 6.40% (as of November 26, 2013). Both of these funds hold a Zacks ETF Rank #3 (Hold).
So for investors willing to ride out the undervalued Singaporean economy, we have briefly highlighted two ETFs tracking the country below (read: Can Southeast Asia ETFs Continue to Rebound?):
EWS in Focus
EWS is easily the most popular Singapore ETF on the market, as it has over $1.22 billion in AUM, and an average daily volume of 1,000,000 shares a day. The product tracks the MSCI Singapore Index, charging 49 basis points a year from investors. The ratio is lower than the average expense ratio charged by the Asia Pacific Equities ETFs.
With 31 stocks in its basket, this fund from iShares puts as much as 66% of its total assets in the top 10 holdings, suggesting higher concentration risks. The presently growing financial sector actually makes up roughly half of the portfolio, leaving around 20% for industrials followed by 13% for telecommunication.
Shares of EWS gained just 3.4% in the last one-year period ended September 30, 2013. EWS moved sideways through the last 52-week period in a tight range of $12.26 to $14.71 per share.
EWS nudged up 0.14% (as of November 27, 2013) in last six trading sessions following the news of an upbeat outlook. It is now currently trading in the mid part of its 52-week range.
EWSS in Focus
For investors looking for small cap securities based in Singapore, EWSS could be an interesting pick. The product is less popular and relatively illiquid, with just $19.7 million in AUM while its volume is quite light at about 10,000 shares a day.
EWSS holds 83 securities and has moderate concentration risk with 41.0% of its assets invested in the top 10 holdings. Much like its large cap counterpart though, the fund has a great deal of exposure to the broad financial and industrial sectors (see Southeast Asia ETF Investing 101).
The fund charges 59 bps in fees per year from investors. EWSS lost about 0.3% in the last six-day period.
While large-cap oriented EWS seems a greater beneficiary of the recovery in broader market over small-cap focused EWSS, the latter pays a solid yield, suggesting it could be an income pick if payout levels hold.
Conclusion
Though Singaporean stocks reeled under pressure so far this year, the recent recoil points to the fact that the country still has room for growth. In fact, Singapore’s remarkable Q3 growth rates and upbeat outlook for the upcoming months bear testimony to its growth story.
While a bright growth outlook is a good indication, some issues still remain. Some analysts are of the view that higher Singaporean growth comes at the cost of higher inflation.
The inflation rate inched up to 2% in October from 1.6% recorded in September. Many analysts are expecting inflation to flare up further in the coming months.
However, the current inflation rate is still within the guided range of 2?3% provided by the central bank in September. Investors should also note that the economy might succumb to a slowdown next year if the global economy fails to grow on par with market expectation, but the near term does appear bright for this island nation.
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ISHARS-SINGAPOR (EWS): ETF Research Reports
ISHARS-MS SG SC (EWSS): ETF Research Reports
