The great Singapore gateway

The Straits Times, February 14, 2007

or Singapore: The Safest Route to Asia's Riches
By Kopin Tan, Barron's


AS A rule, small tropical islands have an obligation to the rest of the world to preserve themselves as sun-filled, rum-soaked, licentious getaways. But Singapore does not do laid-back very well.

Nearly 4,200 flights take off and land each week at its bustling airport, and its port is the world's busiest. At 4.41 million, the number of cellphone users exceeds its adult population, and sometimes they all seem to be talking at once. Even Singapore's national pastimes - eating and shopping - are pursued with a ferocity that might make a New Yorker blush.

These days, there is nothing laid-back about its stock market's performance, either. The iShares MSCI Singapore Fund, an exchange-traded fund listed on the New York Stock Exchange (ticker: EWS), rallied 42 per cent last year and is up 8.7 per cent so far this year. The Singapore Fund, a US-listed closed-end fund, surged 64 per cent last year and has risen 8.7 per cent more this year.

And the benchmark Straits Times Index reached a record peak last week.

The Singapore market has even begun to outpace the bourses in South Korea, Taiwan and the other 'Asian tigers' it once closely tracked. This divergence is only partly explained by the strength of Singapore's banking and real- estate sectors, which helped sustain the city-state through the global technology sector's recent weakness.

The extent of its outperformance - comparable exchange-traded funds (ETFs) for Taiwan and South Korea rose just 16 per cent and 10 per cent, respectively, last year - suggests something else is at work: Singapore's successful transformation into a teeming financial hub, with a rising profile as the gateway to Asia's booming economies.

Singapore's push to become the Switzerland of Asia has impressed Mr Felix Zulauf, head of Zurich-based Zulauf Asset Management and a member of Barron's Roundtable, who said: 'I think it will become the offshore financial centre of Asia.'

He also picked the Singapore ETF as 'a classic way to play the rise of Asia, and the mania I see coming'. Although the ETF's recent surge makes it vulnerable to a short-term correction, it has the potential to roughly double by 2010, said Mr Zulauf.

Singapore's transformation is born of necessity. A tiny South-east Asian country half the size of Los Angeles, it has no natural resources. Recognising that it cannot compete with China or India as a source of cheap labour, Singapore has revamped its manufacturing base to focus on higher value-added industries such as financial services, biomedical research, technology and oil refining.

But it does have the gift of geography. With China and Japan to the north, India to the west and Australia to the south-east, Singapore has always been a key port along the area's shipping routes.

Today, thanks to an established financial and transportation infrastructure, it is also a portal to Asia-Pacific markets. Among its attractions for companies seeking regional bases: generous tax breaks, an educated workforce (the literacy rate is 95 per cent, and 56 per cent are at least bilingual), virtually no corruption, scant crime, a rigorous legal system and - this cannot be overestimated - fabulous food.

When its annual budget is announced tomorrow, Singapore is expected to cut its corporate tax rate by at least one percentage point, from 20 per cent, to help keep pace with Hong Kong's 17.5 per cent and Ireland's 12.5 per cent.

The pro-business stance of its one-party government - steered for 25 of its 42 years by founding prime minister Lee Kuan Yew - is key to its competitiveness. Singapore's GDP expanded nearly 8 per cent last year and is projected to grow 6 per cent this year, even as global growth brakes. A strong Singapore dollar, inflation below 1 per cent, unemployment of 2.5 per cent and 10-year Treasury yields at 3.18 per cent all point to safe, steady growth.

Mr Zulauf is not the only one singing the country's praises. A 2007 World Bank report named Singapore 'the world's easiest place to do business'. A KPMG study of 128 cities last year picked Singapore as the most cost-competitive for business, with expenses 22 per cent below those in the United States. Singapore also topped Standard & Poor's ranking of Asian countries by fiscal prudence, with the government projected to sock away 5 per cent of its 2007 GDP - ahead of even oil-rich Kazakhstan.

To be sure, its export-dependent market will falter in a global recession. It did not escape the Asian financial crisis and suffered through the 2001 recession and the ensuing Sars epidemic scare. And despite diversification, its electronics manufacturing and information technology sectors could be a drag on the market if technology demand slumps.

Singapore's fortunes also depend heavily on China's hardly assured continuing prosperity. But its unique status - a developed country surrounded by developing ones; a stable bridge to emerging markets - offers one of the most balanced and appealing risk-reward profiles among Asian ETFs.

Singapore stocks are now also more fully valued. According to Heckman Global Advisors, a unit of Bear Stearns Asset Management, Singapore is no longer cheap based on conventional metrics such as price-earnings ratios. But a price-to-book ratio of 2.3 times still looks cheap compared with the average 2.7 times among developed economies. More important, earnings momentum - the portion of companies with upward earnings revisions - ranks Singapore third among 23 developed countries.

The first things you notice in Singapore - after the lush greenery - are the crowds. With full employment and its multi-ethnic population growing just 1.8 per cent annually, the government has eased labour rules to boost its workforce, and throngs of Indonesian and Filipino maids, Thai and South Asian construction workers and Chinese waitresses - all holding jobs that locals shun - help make Singapore a land of aspiration.

The standard of living is high. Luxury emporiums from Armani to Zegna all have their outposts, and at the Raffles Hotel, a Singapore Sling will set you back by a cool US$14 (S$22).

The good life, stable outlook and scarce land all bode well for the banking and real estate sectors. The EWS is heavily weighted towards financials (36 per cent), followed by real estate (16 per cent), capital goods (14 per cent), telecommunications services (12 per cent), transportation (9 per cent) and media (4 per cent).

UBS, for example, expects local bank profits to increase 14 per cent this year after a 15 per cent rise last year. While higher interest rates were a catalyst last year, strong loan growth will drive this year's profits as construction and consumer lending increase.

Despite last year's rally, bank valuations remain reasonable at 1.75 times book, or accounting, value. UBS analyst Jaj Singh argued that they should be higher because average valuations over the past eight years tracked a deflationary period, and 'a more relevant period is the early 1990s'. Then, banks traded at 2.6 times book value; UBS' target ratio today is 1.9.

In the banking group, DBS has strong deposits, low funding costs and a 67 per cent loan-to-deposit ratio that leaves room for expansion.

Sure, the night life is not as colourful as Bangkok's, and stiff drug laws mean that any wild partying is fuelled, at most, by Grey Goose and Red Bull. But that has not deterred 9.7 million visitors who flocked to Singapore last year, sending tourism revenue up 14.5 per cent.

Not satisfied, Singapore is building two giant Integrated Resorts - casinos, hotels, malls and convention halls - on Marina Bay and on Sentosa, a nearby island rivalling Las Vegas in artifice.

With investments from Las Vegas Sands and Malaysia's Genting International, analysts see thousands of new jobs by the time these open three years from now.

Real estate prices, which have begun to rebound, are still nearly 30 per cent off their 1996 peaks and are moderate compared with cities like Tokyo and Hong Kong.

The brightening outlook extends to both residential and commercial properties. General Electric, for example, bought a mid-size office tower last year and plans to 'significantly build up the Singapore portfolio over the next three years', said Mr Mark Hutchinson, the Asia-Pacific head of GE Real Estate.

Mr Sean Monaghan, a Singapore-based Merrill Lynch analyst, expects rising demand and constricted new supply to drive prime office rents up 45 per cent to $12.80 per sq ft by 2009.

Among Mr Monaghan's picks are CapitaLand, one of Singapore's largest office landlords and a manager of 13 malls in Singapore, four in Japan and 70 in China; Keppel Land, one of the largest property companies listed on the Singapore Exchange; and City Developments, a property developer and hotel manager that owns nearly 2.4 million sq ft of office stock.

Singapore's economy should thrive for years. Even in a worldwide recession, you have to respect the odds of a country that has defied its limitations and reclaimed 17 per cent of its land from the sea.

And should Asia become an engine of global economic growth in the decades ahead, Singapore will be one of the drivers.

BARRON'S



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DOLLARS AND SENSE

A 2007 World Bank report names Singapore 'the world's easiest place to do business'. A KPMG study of 128 cities last year picked Singapore as the most cost-competitive for business.