Many are now calling into question the economic health of
Singapore, as a number of economic indicators are showing
lackluster results. Singapore – the business center of Southeast
Asia – posted unprecedented results in the current quarter (on an
advance estimates basis), contracting 0.6% year over year against
the year-ago growth of 1.5%.
This is even worse news when investors consider the
projections by the market for the current quarter. The consensus
called for growth of 0.2% for the period, so the slide lower was
quite the surprise.
The manufacturing sector was the hardest hit, shrinking as
much as 6.5%. In the year-ago period, the sector contacted
1.2%.
On a quarter-on-quarter basis, the economy contracted 1.4%,
ruling out the seasonal abnormality, again down from the 3.3%
growth in the preceding quarter.
This could represent a very sluggish time for one of the best
growth stories in the past few decades, and even more so during
recent times. The country was considered a good bet over the past
few years as its impressive unemployment rate (mere 1.8% in the
fourth quarter of 2012) as well as heightened business activities
in the Asia Pacific made it a compelling choice for investment
(Read:
Singapore ETFs for the Rise of Asian Financial
Centers
).
But in the wake of a lackluster first quarter, this positive
outlook seems to have weakened. Following the release of the
result, the market immediately gave a negative reaction leading
to a slew of
downgrades
at some institutes like Credit Suisse and ING Financial
Markets.
Further, Singapore’s economy grew 1.3% in 2012, the slowest
pace in three years while the inflation accelerated the fastest
in eight months in February.
Data
for exports
was also not encouraging for the month of February due to a
stronger Singaporean Dollar (Read:
Inside the Only Singapore Dollar ETF
). The inflation scenario was also not contained in this
island-economy.
Basically, the economy has suffered twin attacks from slower
growth and heightened inflation. The combination generally
results in a strange situation in which measures adopted to tame
inflation will halt growth and vice versa.
Hence, the Monetary Authority of Singapore (MAS) maintains its
tight monetary policy as high inflationary environment does not
allow MAS to opt for an expansionary monetary policy.
Looking Ahead
Despite this doom and gloom over the country, there are still
plenty of reasons to be optimistic. The country remains an
important business hub in the region, and the safety and business
protections in the nation are unmatched across Southeast
Asia.
Furthermore, the country’s central bank reiterated its outlook
of 1-3% of GDP growth for 2013. The central bank also slashed its
inflation forecast
for 2013 to the range 3-4% from the previous range of
3.5-4.5%.
The authority sounds optimistic on the nation’s future and
expects an improvement through the rest of 2013 buoyed by
external demand, and the desire for many businesses to move to
the open-business climate in the nation (Read:
5 ETFs for Countries with Highest Employment
Rates
). At present, Singapore is the
second freest
economy with a score of 88 on a scale of 100, up 0.5 points year
over year.
In view of the ongoing circumstances, investors need to take
great caution when looking at Singaporean
ETFs
. We would like to see which direction the Singaporean economy
heads into in the coming few months before making a definitive
call, as the short term has been negative, but longer term trends
have been decidedly positive.
The biggest Singaporean ETF
iShares MSCI Singapore Index
(
EWS
) which tracks the performance of the MSCI Singapore Index lost
-0.6% year-to-date. With around $1.6 billion in assets, this
large-cap oriented fund is mostly exposed to financials (33%),
industrials (23%), real estate (17%) and telecommunications
(12%).
While the fall was steeper than expected for the industrial
sector in the first quarter, we foresee a risk component in EWS
given the fund’s considerable allocation towards the sector.
While some investors may be beginning to panic over Singapore,
it is probably too early to raise an alarm. It’s true, the
country does have some significant issues plaguing its economy
right now, but there are still some products that are going
steady. One such example is
iShares MSCI Singapore Small Cap Fund
(
EWSS
).
With an asset base around $12.8 million, EWSS has delivered
6.4% year-to-date. This fund, tracking MSCI Singapore Small Cap
Index, has considerable investment in the better-performing Real
Estate sector which is probably the reason for the fund’s ability
to return this year. With 70 assets in its holdings basket, EWSS
also offers greater diversification than EWS which has 32
holdings.
Bottom Line
Singapore has been one of the greatest investing stories in
the post-WWII period. The nation has gone from a small village to
a financial and industrial behemoth, dominating the Southeast
Asian region.
Yet, nothing lasts forever and many are starting to wonder if
other picks in the region could be better positioned in the near
term. This is especially true given the incredible growth rates
that we have seen in markets like Indonesia or the Philippines as
of late.
These worries have begun to appear in stock prices too, as EWS
has faced some severe weakness as of late, signaling to some that
the story in Singapore is over. However, it is important to
remember that the small cap fund, EWSS, has held up quite well,
and thus could be a better play going forward as Singapore finds
its way in this uncertain economic environment.
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ISHARS-SINGAPOR (EWS): ETF Research Reports
ISHARS-MS SG SC (EWSS): ETF Research Reports
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Time to Worry about Singapore ETF? - ETF News And Commentary
