iShares MSCI Singapore Index Fund (NYSEARCA:EWS): A Golden Opportunity You Can’t Afford to Ignore

singaporeHaving just polished off a Tiger beer at the Long Bar at the famed Raffles Hotel in Singapore, I am writing to you from a teak desk in the billiard room. I can’t imagine a better place to sum up my thoughts on the opportunities uncovered by The Oxford Club’s just-completed Southeast Asia Profit Expedition through Hong Kong, Cambodia, Laos and Vietnam. I then continued on my own to Singapore – the financial capital and gateway to the region.

Built in 1887, the Raffles hotel reeks of colonial ambiance and is named in honor of Sir Stamford Raffles, who founded the trading port of Singapore in 1819 with William Farquhar. During the long flight to Hong Kong, I read Victoria Glendinning’s great new biography,Raffles: And the Golden Opportunity. I also spent a couple of hours at an excellent exhibit on Raffle’s incredible career at the Singapore National Library.

Raffles was an ambitious political entrepreneur keen on finding a British port to beat back Dutch influence in the region from its base in Java (Indonesia). Largely on his own initiative, Raffles wisely decided on the island of Singapore and then signed a Treaty of Friendship & Alliance with the Sultan of Johor just nine days after landing with his party.

A Huge Success From the Get-Go

As a free port with no customs duties and open to ships from all nations, Singapore was a huge success from the get-go. Still, Raffles would be amazed to come back and see what Singapore has become – the most strategically important global trading, finance and service nexus in Asia.

While only one-fifth the size of Rhode Island and three times the size of Washington, D.C., Singapore is the “Switzerland of Asia” boasting the world’s biggest budget surplus relative to economic output. As the busiest port in Asia, Singapore is situated next to the vital trading channel of the Straits of Malacca, the gateway for 37% of global shipping and 80% of China’s oil imports. Singapore’s annual trade volumes are a stunning four times the size of its economy.

It is one of only seven countries in the world to enjoy an AAA credit rating. Surprisingly, some firms are moving manufacturing centers from China to high-cost Singapore due to its infrastructure, logistics and laws protecting intellectual property.

Singapore is also a good proxy for many investors, as its companies invest heavily in neighboring countries.

My key takeaway from our trip is that the strategic importance and commercial opportunities presented by Southeast Asia are far greater than currently recognized by investors.

Overshadowed By BRICs

While BRIC countries such as China and India dominate headlines, Southeast Asia is usually overlooked. This is despite the fact that BRIC markets as a group are down over the last year, last two years and last five years while, with one exception, all Southeast Asian markets are up over these time frames.

It may also surprise you that the 10 member countries of the Association of Southeast Asian Nations (ASEAN) have a combined population of 620 million and a GDP approaching $2 trillion. These members are Brunei, Lao PDR, Cambodia, Indonesia, Thailand, Vietnam, Philippines, Malaysia, Burma and Singapore. Their combined economies have grown 170% over the past decade and have about a 6.5% average growth rate.

ASEAN is the United States’ fourth-largest overseas market, and our exports to ASEAN are about the same as our exports to China. In addition, 4.2 million Americans trace their heritage to Southeast Asia and 40,000 students from ASEAN countries are studying in America.

You can see this story is about much more than just Singapore…

The Southeast Asian Frontier

Malaysia, a solid middle-income country, has many of the attributes of its southern neighbor, Singapore, with the added benefit of natural resources and lower wage levels.

Rich in natural resources and a natural gas and oil exporter, Malaysia offers investors an economic environment of low inflation and debt. Although palm oil, tin, petroleum, copper, iron ore and other commodities are an important part of the Malaysian story, it has a well-diversified economy. Just over the border in Johor, Malaysia, Singapore investors are active partners in a massive real estate development called Iskandar.

Vietnam’s ace in the hole is that its manufacturing wage rates are less than one-third that of China’s. While its per capita GDP has been steadily climbing, it has a very long way to go to catch up to countries like Singapore and Malaysia. The same goes for the Philippines. (Its stock market surged 38% in 2012.)

Frontier markets like Laos, Cambodia and Burma are just getting going with their stock markets, so opportunities right now are largely limited to private equity. Doug Clayton, CEO of the pioneering frontier private equity firm Leopard Capital, hosted our group in Cambodia’s bustling capital of Phnom Penh and briefed us on their upcoming property fund for Burma (also known as Myanmar).

The World’s Fastest-Growing Middle Class

Finally, Indonesia has been one of my favorites for quite some time, and its stock market is up a stunning 814% over the last decade compared to 120% for China. Three times the size of Texas, Indonesia is a democracy with the fourth-largest population in the world.

The country is on a roll, fueled by much better fiscal policies. It is the only country in the G20 (largest 20 economies in the world) to have declining government debt/GDP. All this led to an upgrade by Standard & Poor’s, and Indonesian government bonds are now rated “investment grade.”

Indonesia’s youthful population represents the planet’s fastest-growing middle class. A just-released report by the Boston Consulting Group estimates its middle class and affluent consumers at 74 million – and expects this group to double by 2020.

No wonder America’s competitors are all over this region. ASEAN has already begun negotiating a free trade agreement with Australia, China, India, Japan, South Korea and New Zealand. This pact will affect $17 trillion of trade and will be inked by the end of 2015. The China-ASEAN free trade agreement signed in 2010 has contributed to a significant increase in China-ASEAN trade – up 55% in 2011 alone.

To sum up, Southeast Asia is the sweet spot of Pacific Rim growth and the cockpit of global competition. Can you afford to ignore this golden opportunity?

Good Investing,

by Carl Delfeld, Investment U Senior Analyst

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