CHAPTER 8

Singapore

THE MODEL OF EFFICIENCY . . . AND SOMETIMES BOREDOM!

By far the richest country in Asia is Singapore. Of course, it’s kind of like saying that Iceland was one of wealthiest country in Europe for a few months in the 2006 to 2009 period. Singapore is small, very small. Its population could fit in a small Chinese city, with room to spare. At just under five million people, including all the maids from the Philippines and Indonesia, the country barely registers on Asia’s population map. But, through sound fiscal, monetary, economic, and social management Singapore has risen from a backwater 40 years ago to a country that has a greater income per capita than 90 percent of the world. One might argue that it is only possible in places with small, controllable populations, and one would probably be right.

You still can’t buy chewing gum in Singapore, jaywalking will cost you a stiff fine, if you’re caught spraying graffiti you will be caned, and if you are caught with narcotics you’ll be put to death. If you can avoid those infractions and live with the stifling heat and humidity, Singapore is a good place to grab a couple of days of R&R on any Asian trip.

Where it shines though is as an investment destination. One would think that a country that has greater GDP and income per capita than most of the world, a AAA rating, a strong currency, a strong and transparent government, fiscal discipline, and a diverse but happy population, should have no place being an emerging market. Well, by virtue of its small size, location, and tendency to trade like its neighbors in boom and bust cycles, Singapore does belong in the category of emerging markets, albeit at the very top of the Tier 1 countries. If you look at the history of trading of the Singapore exchange, you can see where it suffers from massive sell-offs and massive surges in line with places like Indonesia, Thailand, Malaysia, and every other Asian emerging market.

Figure 8.1 shows you index values from late 1999 when the Stock Exchange of Singapore merged with the Singapore International Monetary Exchange to form the Singapore Exchange.

Figure 8.1 Singapore Stock Market Index

Source: Used with permission of Bloomberg L.P. Copyright © 2011. All rights reserved.

Now, these days, pretty much all charts look like this. Few exchanges globally are immune to crashes and bubbles. However, Singapore is different from non-emerging markets in that the exchange is dominated by a few companies and sectors. Of the total market capitalization of approximately S$650 billion (US$387 billion), fully one-third is made up of companies in the financial and real estate sectors with another third coming from consumer goods and the services sector and less than one-seventh from the industrial sector. Singapore’s business climate is geared toward finance, real estate, and services—all businesses that do extremely well during periods of high consumption and property booms but fade fast during periods of recession. It is not unusual for the Singapore market to have massive sell-offs due to the fact that such a few sectors can change the tide quickly. If you are looking to invest in Singapore, there are more than 770 companies that trade on the exchange . . . but if you’re an American, you’ll find it tough opening an account with a local Singaporean bank or broker without having to jump through a lot of hoops. You’ll need to provide everything from a recent bank statement and passport to your most recent utility bill. They want to know who you are before they’ll take your money, and they’re not shy about saying no. But, it is possible for foreigners to invest in Singapore both directly and through exchange-traded funds and closed-end funds.

Singapore has to be timed in order for money to be made. That timing always coincides with booms and busts in the property markets. The top 30 companies make up an index called the Straits Times Index (STI). Much like the Dow 30 in the United States, the Straits Times is the benchmark most people look to in order to gauge the performance and health of the market.

Banks make up the three of the top four companies in the STI with SingTel, the Singaporean telecom giant, coming in third. The big news in Singapore recently is the introduction of casinos. On my recent trip in 2011, I visited the Marina Bay Sands property with its massive boat-shaped roofline overlooking the harbor. There is a nightclub at the top and an interesting restaurant called Ku De Ta, which attracts a lot of well-heeled foreigners and locals alike. It’s not to be missed. The casino business in Singapore is second in the world only to that of Macau with Las Vegas coming in third, just to give you an idea of the impact of the business in Asia. Macau, the former Portuguese colony that was returned to China in 1999, dwarfs both Singapore and Vegas combined. You can buy into the casino business through a U.S. listed company, the Las Vegas Sands, which trades on the New York Stock Exchange under the symbol (NYSE:LVS). It also owns one of the biggest casinos in Macau. LVS is a great play on emerging market resort and gambling growth, but it does have a history of following Las Vegas and U.S. trends more closely than those in Asia.

For U.S. investors the IShares MSCI Singapore Index Fund is an excellent vehicle to provide diversified entry into Singapore. Of course, diversified in Singapore, as I mentioned earlier, means strong presences in banking, real estate, telecom, and travel and entertainment (including casinos). Table 8.1 lists the top holdings of the fund.

Table 8.1 IShares MSCI Singapore Index Fund

Source: http://us.ishares.com/product_info/fund/overview/EWS.htm.

DBS, Oversea-Chinese, and United Overseas are top financials. Singapore Telecom is self explanatory as is Singapore Airlines. Genting is a large Malaysian conglomerate, and Genting Singapore is a casino holder. Keppel is an offshore marine, property, and infrastructure company. Wilmar is an agribusiness, Noble is a commodities trading company, and CapitaLand is involved in real estate development.

Table 8.2 shows the top holdings by sector.

Table 8.2 Top Holdings by Sector

Source: http://us.ishares.com/product_info/fund/overview/EWS.htm.

There is one other Singapore listed company that I am a fan of. In fact, it was the focus of my most recent visit to Singapore in 2011.

What’s the most precious commodity on Earth? Hint: Despite the current furor over higher prices, it’s not oil.

It’s water. And drinkable water, of course, has only a finite supply—a big problem given that the global population (which last year topped seven billion people) is expected to grow by 40 to 50 percent over the next 50 years.

Fresh water demand exceeds supply by 17 percent. And demand is doubling every 21 years.

Serious shortages already exist in almost 100 countries. And the situation is particularly grave in the developing world.

In short, the world is running out of water.

And for all their emerging market prowess, regions like China, India, Latin America, and Africa are in particularly big trouble. Consider the following:

• China and India account for 40 percent of the world’s population. Yet neither country has potable tap water. Two-thirds of China faces water shortages. And in big cities like New Delhi, groundwater is expected to dry up by 2015.
• In Latin America, about 15 percent of the population—76 million people—lacks safe water. And 116 million don’t have sanitation services.
• Lack of safe water and sanitation costs the sub-Saharan region around 5 percent of its GDP each year.

So what’s the answer? Well, there are increasingly innovative ways to make clean water from dirty water. And one company is doing just that in the most critical of regions.

Because of the massive profit potential that it holds, it’s no wonder that analysts have dubbed the $460 billion global water market “blue gold.”

But to scoop the biggest share, we need to dig a little deeper. For example, while large companies like General Electric and France’s Veolia Environnement are major players, that’s not going to get the job done for us.

Why? Because (1) neither company is a pure play on water, and (2) they aren’t top-to-bottom providers, so there’s a flaw in the business model.

Based in Singapore, Hyflux Ltd. (Pink Sheets:HYFXF) is a leading water industry player with a well-diversified focus on seawater desalination, water recycling and purification, wastewater treatment, and potable water treatment. Its desalination efforts are among the top three in the world.

Hyflux trumps its competition because it doesn’t have to outsource its business. As a result, its margins are higher and it can outbid rivals on new projects, such as building new water plants. This key area of business has spawned a couple of profit streams.

For starters, it makes money from the initial design and construction of new plants, which takes about three years.

Hyflux also strategically partners with local authorities so that its projects make airtight financial sense. The partners provide some of the initial investment capital, but Hyflux runs the operations itself. And since the typical plant lifespan is 25 years, it earns 25 years’ worth of returns.

But the best part?

Hyflux’s target markets are China, India, the Middle East, and Southeast Asia. Those areas comprise more than 50 percent of the global market. Even better, they’re growing and can afford to pay for clean water.

Over the next five years, for example, China is expected to spend close to half a trillion dollars on clean water. It simply has no choice.

Simply put, potable water is the single largest health problem in the world.

And more people = greater demand = shortages.

The above equation couldn’t be simpler given that it includes two undeniable truths: The global population will keep growing, and there’s a fixed amount of water on the planet.

The equation means a potentially massive payday, as the companies in the water business are in the early stages of a long period of prosperity.

Not only that, after meeting with Hyflux executives on my recent visit to Singapore, I believe that now is the best time to buy. For patient investors, the chance to hit this one out of the park is too compelling to pass up.

Singapore Girl

If you’ve never flown Singapore Airlines, it’s a treat—until something goes wrong. “Singapore Girl” is one of the best-known ad campaigns for airline travel. Featuring perfectly coifed and manicured young flight attendants, the ads have been running since the 1970s and the flight attendants, who are as pretty in person, have become the iconic symbol for the airline. Singapore Airlines is known for its ultra modern fleet and in-flight amenities. I flew SIA on one of my trips to Singapore and it was almost everything advertised . . . until we took off from Taipei.

As a frequent traveler, I have been very lucky not to experience too many iffy flights or heavy turbulence—knock on wood. Taking off from Taipei, I was comfortably nestled in my upper deck seat on a Boeing 747 Megatop. The flight attendants, all Malaysian or Singaporean at the time, spoke perfect English and provided a level of service unsurpassed in my travels. About 15 minutes out of Taipei the plane shuddered. I noticed a flash of light outside my window. There was silence for what seemed to be an eternity. The flight attendants stopped speaking in English, adding to the feeling of unease in the cabin. The plane was still flying, so that was good news. After a few minutes the captain announced that one of the four engines had shut down. That was it. I noticed that for the next 60 minutes we were circling the same lights on the ground. It was impossible to talk to the attendants who were suddenly gathered in the galley and not being very social. In fact they looked quite scared. The captain then came on again and announced that we had almost completed dumping enough fuel so that we could land back in Taipei. I decided then that I would think twice about flying SIA, not because of some random engine explosion, but because of the lack of communication from the cockpit and the crew.

Things were decidedly better upon arrival in Singapore. A city-state, Singapore can easily be explored in a couple of days. In fact, if you have a layover of five hours or more there is a special program that allows for a city tour for passengers in transit (www.etour-singapore.com/free-singapore-tour.html). I have stayed at several hotels in the city, but my favorite to date is the Ritz-Carlton, Millenia with a beautiful view of the harbor and excellent service. If you are looking for a more nostalgic, but nonetheless excellent hotel, then choose the Raffles Hotel. It is the grande dame of Singapore and beautiful in its classical colonial design. The Singapore Sling was concocted by a Raffles bartender in 1915, although it sold for a lot less at the time than it does today. A Singapore Sling at the Long Bar will set you back a cool $25!

Singapore has two highlights in my opinion. Casinos you can enjoy anywhere and beaches as well. But what you will not find anywhere else is the variety of excellent foods available all over the city, especially in the open markets. It is one of the few countries where I will eat the street food, as health and cleanliness regulations are strictly enforced. In Singapore, you can get the best of Asian foods in one place. The population has a dominant mix of Malay, Chinese, and Indian. The cuisine is the best of all three and safe. Various neighborhoods offer local specialties and if there is one bargain in this expensive city, it is the food. One food in particular, durian, is very popular amongst Singaporeans. It’s a fleshy fruit that comes in a weird-looking thorny husk that can vary in size, but is usually about the size of a melon. People here go wild over it—I am not among those people. The fruit has a distinctive odor, one that many who don’t like it find quite offensive. Many places, like hotels, won’t allow it to be consumed in indoor areas. To be honest it smells like dirty socks. But, it has a massive, deep-pocketed following with prices ranging from $4 to over $200 for rarer varieties. Buyer beware!

The second treat is the Night Safari. It’s a fabulous experience to visit a zoological park at night and ride around in a tram while the nocturnal carnivores are feeding. If you’ve wanted to see a lion feeding ferociously on fresh meat, this is the place! You can find out more about the Night Safari at www.nightsafari.com.sg/. Be sure to bring mosquito repellant!

Shopping used to be the big draw in Singapore in the 1980s and 1990s, especially for electronics as the country was a major thoroughfare in Asia as well as a manufacturer. The duty-free zone in Singapore Changi Airport is likely the largest in the world, bigger than most shopping malls in the United States. But today, prices are quite expensive and not really competitive with prices online or even at box stores in the United States. The selection is outrageous, though. Clothing is still quite reasonable, and Singaporeans love to shop about as much as they like to eat. Singapore has come a long way in the past 45 years from a backwater port where the per capita income in 1965 was less than US$700 per year to the wealthiest city in Asia today with annual per capita income of over US$44,000 and growing. Unfortunately, the country has become a little too expensive and reliant on buoyancy from ultra high real estate prices and its booming financial center. In the event of an Asian downturn, Singapore will survive but could suffer significantly more than it would appear from surface observations.

Strengths

Singapore has a strong, transparent financial system and strong laws governing the day-to-day life of its residents. It has a superb infrastructure and a natural port and harbor with a long history of commerce. Singapore is one of Asia’s major financial centers on par with the likes of Hong Kong. And the country has a strong multicultural consumption-based economy.

Weaknesses

Singapore has a heavy reliance on a few sectors for growth, namely real estate, finance, and tourism as well as a strong reliance on foreign workers due to its very small indigenous domestic workforce. Its laws are heavy-handed and prohibit some personal freedoms for the sake of the greater good of the people. It is a small country with its own currency that could be subject to stronger macro shocks.

Opportunities

It could become the non-Sino hub for Asian commerce. Its reputation as a private banking sector with strict privacy laws will continue to attract capital—it is the Switzerland of Asia in this regard, although it is slowly succumbing to less stringent privacy laws, as is the rest of the world.

Threats

The country’s over-reliance on foreign labor is beginning to make Singaporeans fat and happy and taking away some of the drive that made the country what it is. It is expensive. The country is beginning to out-price itself and taking on more of a Monaco-like status for Asia. This could lead to social unrest among the low-paid imported working class, something that would be put down harshly by a government not afraid to use force to maintain the appearance of harmony. A strong global assault on banking privacy could undermine the country’s status as a tax haven and a center for private banking.