Eric Dutram: Thanks to debt woes and low growth levels, the focus of many investors is shifting from developed markets in Europe and North America to more dynamic locales in the Asia-Pacific region. This could be especially true in the financial space due to other important trends in this crucial sector.
As we have seen in recent months and years, many governments and populations in the West have taken an increasingly hostile position towards the financial sector. More regulations look to be imposed on numerous sectors while banks aren’t exactly helping their cause with trading fiascos and ever-present scandals hitting news wires all the time (see Three Financial ETFs that Avoid Big Bank Stocks).
With the prospect of more legislation and restrictions being put on the financial space, many are looking instead to relatively welcoming Asian markets in order to make new homes for their firms. In fact, a recent survey of British financial professionals suggested that the top global financial center 10 years from now would be in the Pacific Rim and not in the traditional locations of New York or London.
Instead, these traders highlighted three rising Asian giants as the likely global financial capital; Shanghai, Hong Kong and Singapore. “Financial centers in the West have taken a real battering since the start of the financial crisis,” said Mark Cameron, operations chief at Astbury Marsden.”Cities like Singapore and Hong Kong have been quick to capitalize on setbacks in London and New York, courting investment banks and reacting to demand from expats.”
Yet while any of the three could make for excellent capitals of the global financial system, Singapore stands out among the rest. That is largely because the tiny city-state at the tip of Southeast Asia has a much more international focus than its counterpart in Shanghai, while the legal and political freedoms of Hong Kong could seemingly be squashed in short-order by Beijing (read If China Slumps Avoid These Three Country ETFs).
Meanwhile, there is some speculation that the government would prefer Shanghai to rival international competitors, as opposed to having the nation rely on an old British Crown Colony for financial dominance. Thanks to this lack of Chinese trust by many, Singapore is often a preferred choice despite often having a heavy handed government of its own.
Furthermore, the tax situation is probably better over the long-term in Singapore, as Shanghai faces top marginal income tax rates of 45%— although this starts at a pretty high level— while, as discussed before, one can never be sure what the long-term situation will be in Hong Kong on a policy front.
Singapore on the other hand has no such issues as it will likely enjoy high levels of economic freedom no matter what, as the top marginal tax rate is just 20%, while capital gains and dividends are not taxed at all.
“A fast growing, low tax and bank friendly environment like Singapore stands as a perfect antidote to the comparatively high tax and anti-banker sentiment of London and New York,” continued Cameron in the Reuters article.
Clearly, Singapore stands out as a future hub of financial activity for those looking to be active in markets around the world. It has huge advantages over other top players in the region while it has the added benefit of being more internationally-focused and closer to some of the fastest growing and largest markets in the region, suggesting that Singapore will be tough to beat in the world of Asia-Pacific financial hubs in the next decade.
Given this reality, it could be a great time to look at Singapore for closer investment, especially for investors who think they will come to dominate the Asia-Pacific region from a financial perspective. While only a handful of Singaporean stocks trade on American markets, there are two ETFs that do track the country (readSoutheast Asia ETF Investing 101).
Fortunately, both of these funds are tilted towards financials suggesting that they will be primary beneficiaries of Singapore’s rise in the sector. Below, we have highlighted these two funds in greater detail for those who may be considering making a play on this increasingly important country and the sector which is likely to lead it to prominence over the next decade:
iShares MSCI Singapore Index Fund (NYSEARCA:EWS)
The gold standard in the Singapore ETF market, EWS has been trading since 1996. The fund has amassed over $1.5 billion since then and trades a robust 1.9 million shares a day while charging investors 52 basis points a year in fees for its services.
In total, the fund has about 33 holdings in its basket, with four companies taking up at least 9.5% of the total each. Banks make up 30% of the fund’s assets, while industrials, telecoms, and real estate round out the rest of the top four from an industry perspective and each make up at least 10% of assets as well (readTime to Buy the Singapore ETFs).
Not only is the fund tilted towards the in focus financial segment, but it has a robust 2.8% 30-Day SEC Yield as well. The product has also been a star performer year-to-date, adding about 20.6% in the time period, while the fund has also outperformed the S&P 500 over the trailing five year time frame.
iShares MSCI Singapore Small Cap Index Fund (NYSEARCA:EWSS)
This product is the relative newcomer onto the scene, having made its debut in January of this year. Unfortunately, the fund hasn’t yet caught on with investors, as just under $4 million is in the product, giving the fund low volumes and wide bid ask spreads which can help to push total costs above the 0.59% expense ratio.
EWSS holds 40 securities, doing a pretty solid job of spreading out assets among the top components. Much like its large cap counterpart though, the fund has a great deal of exposure to the broad financial/real estate sector as REITs make up more than 45% of the fund.
This gives the product a pretty hefty level of concentration into one sector, but this segment could be a big winner if current trends in the market continues and the country becomes an even more popular destination for financial professionals. Beyond this, investors should note that industrials and consumer staple firms round out the top three from a sector perspective, combining to make up 20% of the total assets (see more in the Zacks ETF Center).
The 30-Day SEC Yield is also quite impressive for this fund, coming in at just under 3%, pretty good for a small cap centric product. Valuation metrics are also reasonable for the fund, while it has actually beaten out its large cap counterpart since its inception, surpassing the large cap version by about 700 basis points since mid-January.
Clearly, either fund could give investors targeted exposure to the broad financial segment in Singapore. If present trends continue this could be a relatively good thing, suggesting that this could be one case in which having a heavy level of sector concentration in a national ETF is something to be desired and maybe even thankful for, assuming of course that Singapore can become the top financial center in ten years time.
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