Martin Hutchinson:  Having spent three years there as a child, I have happy memories of Singapore. In those days, most of the locals lived in “atap” palm-frond-roofed huts and bathed by standpipes.

Today’s Singapore is completely unrecognizable to me.

It is a modern country that is now among the world’s richest. There is  barely a palm-frond roof to be found anywhere.

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Singapore is also ranked firston the World Bank’s Doing Business list  (the U.S. is fourth), secondon the Heritage Foundation’s Index of Economic Freedom (the U.S. is 10th ) and fifth on Transparency International’s Corruption Perceptions Index (the United States is 24th  ).

So why is the Singapore stock market trading on an 8.3 times P/E ratio,  according to the Financial Times?

The Upside of the Singapore Stock Market

After all, its economy is in fine shape, and is growing faster than any of the  major Western economies.

In fact, with its GDP per capita estimated at $50,700, Singapore is now richer than the United States.

It’s all proof that as the world’s leading trade entrepot,  Singapore is aggressively moving up the global value chain as its citizens become richer and better educated.

And unlike the U.S., Singapore’s recovery from the 2008-09 recession was rapid,  with 14% growth in 2010.

Since then, it has entered a mini-recession, with GDP declining at a 2.5% annual  rate in the fourth quarter of 2011. Still, overall growth in 2011 was a solid 4.8%,and the country is expected to grow by another 3.1% in 2012,  according to the analysts at The Economist.

Inflation is a moderate problem, running around 5%, although it is expected to decline.

Yet the most impressive statistic about Singaporeis its current account  surplus of 18.4% of GDP; the budget is also in modest surplus, as it is most  years.

With a GDP of only $266 billion in 2011, Singapore is a relatively small  economy. But its exalted position in wealth, economic freedom and clean  government and business make it a country that is a highly attractive place to  invest in.

That’s why its current modest P/E ratio is so surprising.

The recession has affected bank earnings (Singapore is a center of private banking, with excellent secrecy laws) but its industrial companies appear to be doing well, so patient investors should find themselves very well rewarded  indeed, as the market enjoys an upward re-rating.

Investing  In the Singapore Exchange (SGX)

Since Singapore itself is one of the world’s major stock exchanges, its  companies do not have full listings on the U.S. exchanges. To  date,compliance with the Sarbanes-Oxley legislation has deterred them  from doing so.

For investors that means the most efficient way to invest in Singaporeis the iShares Trust MSCI Singapore index (NYSEArca:EWS),  which has net assets of $1.5 billion and an expense ratio of only 0.55%.

With a P/E ratio of 13, somewhat above the market as a whole but still reasonable, and a yield of 3.8%, this Singapore-based ETF is an attractive way  into the market.

For the more adventurous, I recommend the Pink Sheets ADRs of Keppel Corporation (PINK:KPELY).  Each ADR represents two shares of Keppel common. Its P/E ratio is 10.8 times  and the yield is around 2.2%.

Keppel is the only company I can think of named after a British Admiral of the  Fleet, Sir Henry Keppel (1809-1904). It is a name I fondly remember from  my Singapore childhood.

As Commodore in the 1840s,Keppelwas posted to the Singapore  station, where he defeated the Borneo pirates and discovered Singapore’s  magnificent deep-water harbor, which was renamed in his honor when he revisited  Singapore in 1903, as a 93-year old Admiral of the Fleet.

Keppel Corporation began as the shipyard for Keppel Harbor and later diversified into real estate and oil drilling rigs. It is currently re-developing Keppel Harbor with luxury apartments.

Keppel now has operations in over 30 countries in offshore drilling equipment, environmental engineering, real estate development and logistics.

In 2011, Keppel’s revenues grew by 10% and earnings per share jumped by 13%. Meanwhile, its offshore rig division captured $10 billion in new orders, more than double the previous year’s level.   As a growth proposition, Keppel is a particularly attractive.

Fifty years later, Singapore is much more than a place of great memories.  Today its stock market is the biggest bargain in the world.

Related: iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM), Vanguard Emerging Markets ETF (NYSEArca:VWO).

Written By Martin Hutchinson From Money Morning

Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor  to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of  the Financial Services Volunteer Corps, Hutchinson became an advisor to  the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what  they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.

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