Time to Worry about Singapore ETF?

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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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