Swing Through Singapore

I was recently interviewed for a column about the iShares Singapore(EWS Quote), but I was not thrilled with the very limited exploration of the fund and the investment story in Singapore, so I want to provide further analysis here.

Singapore's economy is known for a lot of manufacturing and exports, and the country's GDP growth engines are firing on all cylinders.

The most recent GDP report came in at 6.8% for the first quarter, and for 2006 the government increased the upper end of its estimated range to 7%, compared to 6.4% in 2005.

Electronics manufacturing accounts for 9% of Singapore's economy, so some may liken it to Taiwan.

But Singapore's market is actually much more diverse, and the composition of iShares Singapore makes that plain.

Only 19% of the fund is directly exposed to tech manufacturing, compared to close to 60% of iShares Taiwan(EWT Quote).

The largest sector weight in EWS is the financial sector, at 35%, and three of the fund's four largest holdings are financial stocks. The heavy weighting in financials contributes to EWS' 3.2% dividend yield.

In addition to financials, telecom services (11.5%) and transportation (9.3%) also weigh heavily in the fund.

Although the economy relies strongly on tech manufacturing, I believe the heavy exposure to these other sectors allows some insulation from the immediate ups and downs of market perceptions about the current state of tech.

In fact, according to the iShares Web site, EWS has a beta of 0.66.

While I will take their word for it, I wanted to include a very long-term chart to illustrate the potential feast-and-famine dynamic possible when you buy this country.

Source: YourSource Financial

The Asian contagion did not start in Singapore, but the country felt it nonetheless and still has not fully recovered. The extent to which the U.S. and Singapore stock markets correlate similarly ebbs and flows. I would expect there will continue to be varying degrees of correlation in the markets.

With all of that noted, Singapore is often mentioned positively by Jim Rogers for what he believes is a very stable currency that is well managed by its central bank, the Monetary Authority of Singapore (MAS). The MAS is unique in that it does not manage policy through interest rates, but instead allows its currency to weaken and strengthen as it sees fit in reaction to economic events.

The bank appears to be doing a good job, as the nation's economy enjoys high GDP growth, low bond yields (10-year government bonds yield about 3.4%) and low inflation (1.4% for the first quarter).

Source: YourSource Financial

In the last six months, like most foreign currencies, the Sing dollar has appreciated significantly against the U.S. greenback. Indeed, it has not been this high since 1998. The combination of high growth, low inflation, low interest rates and its current account surplus are all important ingredients for the continued success of the Singaporean currency and stock market.

I believe the biggest risk factors for Singapore could come from outside its borders. If there is ever another 1997-like crisis in the region, you should not expect the country to be immune. As the last few weeks have shown, Singapore is likely to get caught up in any correction of emerging-market equities.