Long before China and India hit the modern world economic stage, Singapore, which gained its independence from the Malaysian Federation in 1965, was the gateway to commerce in Asia.

The country's port is among the world's largest and is second only to Hong Kong as a transshipment hub. However, due to its unique position as a key crossroads in the global trading system, Singapore ranks as the world's busiest port overall. In fact, it handles a quarter of the world's shipping containers and half of the world's supply of crude oil.

With a population of around 4.6 million, the country generates a per capita gross domestic product equivalent to $44,600, one of the highest per capita GDPs in the Asian region, trailing only Hong Kong and Japan. In addition, according to the quality-of-life index put together by the Economist Intelligence Unit, Singapore has the highest standard of living in Asia and is ranked 11th in the world.

The country's economic fundamentals -- year-over-year GDP growth of 8.1% as of October, low consumer-price inflation of 0.7%, a 2.8% jobless rate and the largest current-account surplus (28.5%), as a percentage of GDP, of any Asian nation -- are very healthy. Singapore also enjoys a budget surplus equal to 6% of its GDP.

Though such a high growth rate makes the economy vulnerable to overheating, the slowing U.S. economy will act as a stabilizer, bringing the island's growth back to more sustainable levels.

The key point for investors is that Singapore, even if facing a lower GDP rate, is likely to be a very attractive investment, as capital tends to seek stable, well-run economies producing competitive returns. With the U.S. economy slowing, Singapore's appeal can only grow.

An Asian Play

TheStreet.Com Ratings believes the

iShares MSCI Singapore Index Fund

(EWS) - Get Report

is a good opportunity for investors interested in exposure to the country.

This exchange-traded fund seeks results in line with the MSCI Singapore Free Index, which it tracks closely in terms of holdings and their respective weightings. TheStreet.com Ratings rates EWS a buy and gives it a B+ rating.

The fund's portfolio is very concentrated, and with 70.61% of assets allocated toward its top 10 holdings, is best described as nondiversified.

This concentration does carry risks. If these particular companies, and the sectors they are in, do not perform well, such an approach could result in poor returns. However, with that risk, of course, comes the potential for higher returns should the fund's bets prove correct.

As the table below illustrates, the fund is making those bets primarily in the banking, capital goods, telecommunications, real estate and transportation areas.

The table below lists MSCI Singapore's recent holdings:

Vital Quartet

The fund's top four holdings -- three in the financial sector and one in telecommunications services -- account for 47% of the portfolio.

Let's take a closer look at these companies to get a feel for the style of the portfolio and perhaps gauge its prospects. (1 Singapore Dollar (SGD) = 0.63135 USD).

DBS Group Holdings

, which operates the largest bank in Singapore, provides mortgage financing, nominee- and trustee-funds management and corporate advisory and brokerage services. It is also the primary dealer of the country's government securities.

Fourteen of the 21 investment firms that cover this stock rate it a buy, while seven have a hold rating on it.

DBS currently trades at about 20.4 SGD. The company had a lackluster 2005, with its share price falling to a low of around 14 SGD in July of that year. Since then, however, the stock has rebounded, rising to its current level, which is its 52-week high.

DBS trades at a P/E -- a valuation ratio of a company's current share price compared to its per-share earnings -- of 28.41, which is high and reflects anticipated growth for the coming year, considering that a P/E between 15 to 20 is the upper threshold for a mature company. The firm's market capitalization is 30.7 billion SGD ($19.4 billion). The stock's one-year total return, through Oct. 3 (which includes both capital gains and dividend income), of 34.11% will be hard to match given the run-up in share price over the last year. However, this stock is viewed to outperform the market going forward.

United Overseas Bank

offers private banking and trust services, venture capital investment, merchant banking, brokerage services, insurance, fund management, derivatives and precious-metals trading and life insurance.

UOB currently trades around 17 SGD. The stock hit a low of about 13.50 SGD in October 2005, and, like DBS, has rebounded nicely to its current price, which is also its 52-week high. Of the 21 firms that cover this stock, 16 rate it buy and five hold. It trades at a very low P/E of 10.58, which suggests that its growth prospects may be limited.

Another way to view UOB may be as a good value investment. The company's market capitalization is 25.9 billion SGD ($16.4 billion), and the stock's one-year total return through Oct. 3 was 27.68%. It is difficult to see this growth being matched going forward, but the stock is expected to outperform the market in general.

Singapore Telecommunications

sells and maintains telecommunications equipment and provides mobile-phone, paging, computer-network, internet and information technology services.

The stock is trading around 2.4 SGD and has been a relatively flat performer. Its current price is equal to its November 2005 level. In between, in March 2006, the shares hit their 52-week high of 2.786 SGD. The stock's one-year total return -- through Oct. 3 -- is a very poor 2.92%, and this performance may be the reason for the low P/E of 9.5. Not much in the way of growth expectations here, and not the kind of stock that investors want to see heavily weighted in their portfolios.

However, of the 19 investment firms that cover ST, 12 rate it a buy, five a hold and two a sell. The 12-month consensus price target is 2.93 SGD, which, if attained, would yield a 22% capital gain. So while this stock has inhibited the performance of the iShares Singapore fund over the past year, it still has a chance to contribute in a meaningful way in the future. The company's market capitalization is 38.11 billion SGD ($24 billion).

Oversea-Chinese Banking Corporation

provides banking, finance, investment, corporate and brokerage services, in addition to asset management, venture capital and nominee and trustee services.

The stock trades at 6.9 SGD and has experienced a steady increase since June 2004, when it traded at 5 SGD. Its current price is very close to its consensus estimate of 7 SGD. Accordingly, 13 of the firms covering the stock rate it a hold, four a buy and three a sell.

The stock's one-year total return was 14.33%. It does not look as if this company is expected to add too much to overall fund performance. The stock trades at a P/E of 12.12, and the company's market capitalization is 21.57 billion SGD ($13.59 billion).

In summary, the fund's prospects depend in large part on these four stocks, with two -- DBS and UOB -- looking to lead.

The table below, which illustrates the growth of EWS and the MSCI Singapore Free Index, gives you an idea of the fund's performance over the long and short terms.

The table below breaks down Singapore's $194 billion gross domestic product into sectors:

Service-producing industries account for approximately two thirds of Singapore's GDP, and this is exactly where iShares Singapore is focused. This, combined with the nation's excellent fundamental economic indicators, makes this fund an ideal candidate for inclusion in a diversified portfolio.

Sam Patel, CFA, is the manager of mutual fund Research for the TheStreet.com Ratings.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback;

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