Why stocks in Singapore offer the best of both worlds
Singapore combines emerging market returns with developed market stability, says a U.S. expert who recommends two stocks and an ETF.
Singapore is an island in more ways than one.
It is separated from Malaysia by a narrow strait. It is also separated from other emerging markets.
In a sense, Singapore emerged some time ago. This former British colony, an independent republic since 1965, has all the earmarks of a mature economy.
Yet it’s also a vibrant, growing economy. Here’s how one U.S. expert on foreign markets puts it.
“Singapore’s stock market offers investors the best of both worlds: The stability of a developed economy, coupled with returns that rival those in nearby emerging markets.”
Mr. Yiannis G. Moustrous writes regularly on overseas markets for Personal Finance. He is also the editor of a newsletter called Global Investment Strategist.
Singapore has a unique role to play, this analyst observes. For investors weighing the risk of higher volatility in developing markets against “the potential for outsized returns,” this island of stability may be the right answer.
Mr. Mostrous makes his case for Singapore and fills it out with recommendations for two stocks and one exchange-traded fund (ETF).
Big financial advantage
The MSCI Singapore Free Index is a proxy for Singapore’s stock market. Over the past five years, it has appreciated by almost 25 per cent. Yet the index’s beta (the standard measure of market volatility) is far lower than those of other Asian emerging markets.
“Singapore’s proximity to Asia’s fastest-growing economies is a big part of its growth story, though the government’s efforts to transform the nation into a leading financial center shouldn’t be overlooked,” comments Mr. Mostrous.
As the world economy strengthens, so will Singapore’s. Its stock market, which has more or less treaded water so far this year, should post solid returns through the balance of 2011, says the analyst.
Singapore has one big financial advantage. Its currency is strong. The Singapore dollar reached an all-time high recently as the government put forth a third round of monetary tightening.
This will enhance returns for U.S. investors, although it will not do quite the same for Canadians armed with a rising loonie.
But there’s another benefit to the strong currency. It has “helped to buffer the country from rising food and energy costs, a major concern in import-intensive economies,” notes Mr. Mostrous.
Inflation remains at a reasonable rate of 3 to 4 per cent. Meanwhile, the economy will not reach last year’s red-hot growth rate of 10 per cent (probably just as well in the interests of stability). But gross domestic product should expand by a healthy 5 per cent.
Business loan growth grew to an average of 2.3 per cent in the first two months of the year, adds the analyst, “suggesting that corporations see opportunities to expand and maintain a sanguine outlook.”
Jack-up rigs
A sanguine outlook for investors starts with Singapore’s biggest conglomerate. Keppel Corp. (Singapore-BN4; OTC-KPELY) is the world’s biggest producer of oil rigs, among other things.
The largest contributor to earnings is the offshore and marine division, which covers offshore oil rig construction, shipbuilding and ship repair and conversion. It also has property and infrastructure divisions, and has a hand in Singapore’s robust real estate market through Keppel Land.
Keppel expects the market for high-specification jack-up rigs — essentially mobile platforms — to remain strong. It picked up more than US$4 billion in new orders in the first quarter.
The company has the added advantage of reliability. It delivers its rigs with an average delay of 12 days. The industry average is 90 days.
Profits were up 8 per cent from last year in the first quarter. With oil prices staying high and the Gulf of Mexico re-opening, the future looks good for this firm.
The stock is a buy up to US$22, says this analyst. It trades at $18.62 in New York and yields a solid 4.5 per cent on its $0.84 dividend.
A bonus market
A good place to look in overseas markets is the local telecom company. In Singapore, when you invest in this market, you get a bonus market thrown in — India.
Singapore Telecom (Singapore-Z74; OTC-SGAPY) owns 32 per cent of Bharti Airtel (India-532454), the fastest-growing telecom in India and “a rising star in Africa,” adds the analyst.
Singapore Telecom also has a steady, profitable domestic business as well as interests across Asia in Australia, Bangladesh, the Philippines and other countries.
When we reported on this stock eight days ago, two other analysts from the same advisory had it as a buy up to US$25 (see Daily Buy-Sell Adviser, May 10).
But Mr. Mostrous goes higher, making it a buy up to US$30 for growth and income. It is trading at $25.78 on the Over the Counter board and yields 4 per cent on a dividend of $1.01.
Investors who are more comfortable with the whole market rather than individual stocks can turn to iShares MSCI Singapore Index (NYSE-EWS). Keppel and Singapore Telecom are both in its portfolio, although 46 per cent of its assets are in the financial sector.
This should pay off in 2011 as the nation’s financial institutions reported strong earnings in the first quarter and issued bullish outlooks for the rest of the year.
This ETF is a buy up to $16 and trades at $14.17.
There may be no place like home, but if you’re looking for an emerging market that looks a lot more like home, this analyst suggests, Singapore would be the place.
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