singapore hotel: Time to Worry about Singapore ETF?

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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