article 10-15-2012

Singapore: Developed-Country Play on Asian Emerging Markets

David Nadel, Portfolio Manager and Director of International Research, recently visited Singapore to meet with potential investment opportunities and offers his thoughts on a country built around economic growth.



For more than half a century, Singapore has been among the precious gems of the global economy. Real GDP advanced 8% per annum on average for 40 years from 1960 to 1999.1 After a strong 2011, Singapore's economy is expected to expand further this year, albeit at a sharply reduced rate. Singapore is now not only among the world's richest countries per capita, outpacing the U.S. and other leading nations,2 but is also regarded as one of the world's top countries for ease of doing business.3 Making our second visit in the past two years, we recently returned to this island powerhouse in order to meet with nine new companies after having met with 18 in 2010.

Ever-mindful of Royce's value orientation and long-term investment horizon, we were drawn to return to Singapore by the curiously cheap long-term valuation of so many of its stocks. Singapore trades at just 12x the average of its last 10 years of earnings.4 For long-term investors such as ourselves, the 10-year CAPE (cyclically adjusted price-earnings ratio) is more meaningful than a traditional P/E because it reflects full-cycle earnings.

Naturally, Singapore's current 10-year CAPE includes the 2008-09 period, when its economy and corporate earnings retrenched dramatically before confidently recovering. Singapore's modest 12x CAPE represents a sharp 45% discount to the country's historical norm—a CAPE of 22x, as shown below. Equally of note, its current 10-year CAPE is at a 43% discount to that of the U.S., which is trading at nearly a 21x 10-year CAPE (vs. a historic norm of 14x) and a similar discount to regional peers such as Indonesia (24x current 10-year CAPE, 16x historic norm) and Malaysia (20x current 10-year CAPE, 18x historical- norm).

Singapore Global 10-Year CAPE
Source: Cambria Quantitative Research


While Singapore is a developed society, many of its companies are proxies on neighboring emerging markets, given their regional activities. Burma's 50 million consumers, for example, are becoming more active now that the country is emerging into the political daylight. While locally listed Burmese companies tend to fall short of Royce's quality standards, we visited, and remain invested in, a well-run Singaporean company that sells large amounts of instant coffee to the Burmese. I have been interested in investing in Burma since touring the country a few years ago.

Not unlike the American economy historically, one key to Singapore's success has been its ability to opportunistically remake itself to take advantage of tectonic shifts in the global economy. In 1971, when the Nixon Administration scrapped the gold standard, Singapore quickly became a key center for foreign exchange.5 Now, Singapore is well-positioned for the potential free float of the Chinese Renminbi.

Similarly, since Swiss banks were forced to divulge sensitive information about their private-banking clients in the wake of 2008's global economic crisis, Singapore has taken a significant share of global wealth management. CitiGroup employs 9,400 workers in Singapore today, versus 100 in 1970.6 My hotel was situated amidst a cluster of skyscrapers, most bearing the names of banks. Singapore's sovereign fund, Temasek, is among the world's most important, with assets of $150 billion.

Yet finance is only one piece of Singapore's successful economic puzzle. The country is of course strategically located: its port is the busiest in the world.7 Fifty percent of Singapore's exports are in high-tech, the highest proportion of any country in the world.8 The country is the U.S.'s fifteenth-largest trading partner despite its tiny population.9

Singapore has effectively courted pharmaceutical and biotech companies, making the country a hub within Asia for this activity; we met with the world's leading pure-play producer of drug-eluting stents used to treat cardiovascular disease which is on the rise particularly in the Asian region on which they focus. Tourism is growing 8%-9% per year, with the country now hosting nearly 13 million tourists a year, more than double its population.10 Among Singapore's draws for tourists are Formula One car-racing, the night safari for families, amusement parks, and two casinos.

Singapore's Marina Bay Sands Casino
Believed to be the world's most profitable casino, Marina Bay Sands, paired with Singapore's other casino run by Genting, reportedly out-grosses the entire Las Vegas Strip.11 (Photo source: David Nadel)

Helped by the ease of doing business, effective rule of law, educated workforce, scarcity of corruption, and corporate tax rate of 17%, Singapore has attracted more than 3,000 global multinational corporations (MNC's), few of which are in finance. Just 2% of its workforce is unemployed.12

Singapore Compared to Global Tax Rates
Singapore's corporate tax rate at 17% is less than half of the US's.13

Government and Education

In an age when many criticize governments for incompetence, bloated bureaucracy, and shortsightedness, Singapore's state appears relatively accountable and efficient.

A large part of Singapore's social harmony can be traced to public policy.14 In an age when many criticize governments for incompetence, bloated bureaucracy, and shortsightedness, Singapore's state appears relatively accountable and efficient. Its government comprises a mere 19% of its GDP and provides a highly effective primary-education system, safe streets, clean public facilities, affordable world-leading medical care, and infrastructure which, we reluctantly admit, puts much of ours to shame.

Singapore also boasts an enviably experienced and well-paid civil service, with experts possessing executive experience and, among the top levels at least, commanding annual salaries of $2 million or more. The Singaporean election cycle of five years encourages policy-makers to think longer term.

Interestingly, Singapore has eschewed a Western "all-you-can-eat" approach to government services, focusing instead on the building blocks that encourage citizens to help themselves. Spending on primary school education comprises only 3% of GDP, a fraction of U.S. levels. Public school teachers must meet standards of competence, with all having graduated in the top third of their class, as is incidentally the case in Finland and South Korea. Is it any wonder these three countries regularly score at or towards the top in international rankings of high school performance in math, reading and science, whereas the U.S. rarely cracks the top 20?15

Meanwhile, employees contribute 20% of their salaries to the Central Provident Fund, with employers almost matching this amount, and these resources help Singaporeans finance housing, retirement, health care, and tertiary education.


Does all this efficiency come at a price? Certainly—Singapore has far fewer social freedoms than most western nations. Wired magazine once referred it as "Disneyland with the death penalty," ostensibly to encapsulate its peculiar mix of sanitized fun, organization, commercialism, and the somewhat draconian rule-of-law.16 Chewing gum was famously banned in 1992, and is still subject to a fine. You see more public services announcements in the country than almost anywhere else.

Singapore Safety Signs
Public service reminders meant to encourage responsible behavior on a construction site. (Source: David Nadel)

Many Americans would chafe at not being able to drive freely. While the public transportation system is top-notch, the government has a heavy-handed way of guiding Singaporeans to use it, which is to make car ownership prohibitively expensive. Car ownership is heavily regulated in Singapore and can be three times as costly as in America. Between high import taxes, quotas and the expensive Certificate of Entitlement, an Audi A4 would cost upwards of $160,000 and a BMW 328 north of $200,000.17 The policy favoring public transport is a boon to the country's dominant taxi operator, a growing business that generates a nearly 20% operating cash-flow yield, in which we have now invested after meeting with them.

Other freedoms we take for granted are not easily available to Singaporeans. Whereas Americans freely exercise their right to sue, litigiousness is typically frowned upon in Singapore. Unions, management and government generally avoid protracted disputes, practicing so-called "tripartism" instead.18 The aggregate malpractice insurance for a medical group with which we met is less than $250,000/year—a pittance considering they generate revenues of $300 million from a 200-bed hospital, 70+ clinics, and 250 doctors on the payroll—because malpractice lawsuits, which are a constant source of potential peril to American doctors, are very rare in Singapore. Finally, you will not find concerned citizens protesting on streets or in parks, although freedom of expression is improving in the media, especially the internet.

Leaving Singapore at the end of my trip, I was reminded that, it is among the few cities in the world where you can drive from the city center to the airport in around 20 minutes. From the moment you leave downtown, you are driving on reclaimed land, all the way along the East Coast Park highway to, and including, Changi airport, which is among the most impressive international hub airports I have seen among the 60 countries I've visited. Some 12% of Singapore's 680 square kilometers is reclaimed, and plans call for an additional 100 sq. km to be reclaimed by 2030.19 Singapore's government takes nation-building literally!

Important Disclosure Information

The thoughts expressed in this piece are solely those of David Nadel and may differ from those of other Royce investment professionals or the firm as a whole. Mr. Nadel's thoughts and opinions are given rendered as of the date of each posting and may change without notice. This piece is not intended to be investment advice or a recommendation to invest in any securities, region or country. There can be no assurance with regard to future market movements. Data from third party sources used in the preparation of this piece may not have been independently verified by Royce, and Royce does not guarantee its accuracy. The historical performance data and trends outlined are presented for illustrative purposes only and are not necessarily indicative of future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of micro-cap, small-cap and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) Securities of non-U.S. companies may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic or other developments that are unique to a particular country or region. (Please see "Investing in Foreign Securities" in the prospectus.) Therefore, the prices of securities of foreign companies, in particular countries or regions may, at times, move in a different direction than those of securities of U.S. companies. (Please see "Primary Risk of Fund Investors" in the prospectus.)

3Milken Institute; Atlantic Monthly
4Cambria; Cambria's CAPE's as of June 30, 2012
5The Economist,
6The Economist,
7Singapore's port trades a greater volume than Rotterdam or Hong Kong. International Herald Tribune, Wikipedia,
8Milken Institute
11The Economist,
12Bloomberg, Wikipedia,
13OECD, KPMG, Milken Institute, Atlantic Monthly
14The Economist,
15Milken Insitute
16Wired Magazine,
17Expat Singapore,
19The Basement Geographer,

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