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iShares MSCI Singapore Capped ETF (NYSE:EWS) is an exchange-traded fund that tracks a basket of stocks from the local market index. The ETF provides good exposure to the market through a number of companies with significant operations in the market. Singapore is recognized as one of the world’s most developed and prosperous countries with a history as a British colony dating back to the early 19th century before becoming an independent city-state in 1965. Supported by strong trading links and high tech manufacturing, the country has become an important global financial. The Singaporean government maintains a AAA sovereign credit rating representing a benchmark for stability and pro-investor policies. While Singapore fundamentals are strong and benefits from favorable structural features, recent data suggests the economy is amidst a slowdown. This article highlights current macro developments and the outlook for Singaporean equities as it relates to the EWS ETF.
EWS weekly price chart. Source: FinViz.com
Singapore Macro Outlook
Singapore’s Q1 GDP growth of 1.2% year over year was the slowest rate going back to 2009. The print follows a deceleration in recent quarters that has been blamed on a continued slowdown of global trade and particular weakness in electronics production. Manufacturing is an important sector in the economy, representing 22% of GDP and it posted a contraction of -0.3% y/y in Q1 compared to a 7.0% increase in 2018. The concerning trend is that most other sectors decelerated compared to the previous quarter and the period last year. The appearance here is of a broad based cyclical slowdown beyond just the trends from a single sector. Finance & insurance sector expanded at a slower pace of 3.2% y/y, down from 5.8% in 2018. Retail sales declined 0.7% in Q1 following a 2.3% slide in Q4%.
Singapore Quarterly GDP Growth. Source: Trading Economics
The Monetary Authority of Singapore in its June monthly report cited an expectation of continued external headwinds pointing to muted demand for semiconductor industry in particular being “not suggestive of a near term improvement”. The weaker production data is reflected in falling non-oil domestic exports which declined 15.9% y/y in May. The Monetary Authority of Singapore maintains a GDP growth outlook for 2019 in the range between 1.5% and 2.5%, but also made comments suggesting it would review the estimates, implying there is some downside risk.
Singapore Economic Indicators. Source: Monetary Authority
More positive data points include a still firm labor market with the unemployment rate at 2.2% which has been steady in recent years. Hiring in the more labor intensive and still growing services sectors has balanced weaker industrial production labor related segments. Low inflation is another strength of the economy with core consumer price index at 1.6% year over year.
Despite the recent weak economic indicators, the underlying fundamentals remain stable. It’s worth nothing that external account figures including a structurally recurring current account surplus and large capital inflows remain a strong point in the economy. The government benefits from a large sovereign wealth fund that limits external vulnerabilities. As it relates to growth and local investment conditions, however, it’s clear the outlook has deteriorated more recently.
EWS Analysis
EWS is the largest Singapore country ETF traded on a U.S. exchange. The fund has $608 million in total assets under management and charges an expense ratio of 0.50%. Some of the key facts and portfolio characteristics published by iShares are reproduced below. Check out the fund prospectus for full list of risks and disclosures.
EWS ETF key stats. Source: iShares
DBS Group Holdings Ltd. (OTCPK:DBSDY) “Development Bank of Singapore” is the largest holding in the fund with a 17.6% weighting. The bank has a market cap of approximately $50 billion and $10 billion in revenues over the past year with a presence in 18 markets across Southeast Asia including China. The ETF has a large concentration in financials including Oversea-Chinese Banking Corp Ltd. (OTCPK:OVCHY), and United Overseas Bank Ltd. (OTCPK:UOVEY) which together with DBS are the top three largest holdings and represent 43.4% of the fund. The performance of this group has been relatively flat over the past year, although volatile. Sentiment could remain weak while the economic outlook remains poor.
Data by YCharts
These banks have a regional presence, but nevertheless, have significant exposure to local trends and domestic credit conditions. A deteriorating economic outlook from here would be a clear negative for this group. Going down the list of holdings, Singapore Telecommunications Ltd. (OTCPK:SGAPY) is the largest wireless provider in the country and is more of a “pure-play” on domestic trends. Ascendas Real Estate Investment Trust (OTC:ACDSF) is a Singaporean REIT with business and industrial properties, another stock with good exposure to domestic macro conditions.
Industrials sector stocks represent 18.8% of the fund and these companies are more global in terms of operations. Singapore Technologies Engineering Ltd. (OTCPK:SGGKY), representing a 3.3% weighting in the fund, is a government linked manufacturer of equipment across segments like aerospace and electronics with a global business as 40% of revenues are from outside Asia.
Overall, there is enough exposure to the domestic economy that the ETF could face pressure should the economic environment deteriorate. On the other hand, the number of industrial and tech firms with global businesses and larger portions of revenues outside the region provides some diversification. The dividend yield for the EWS is 3.6%.
EWS Holdings. Source: Seeking Alpha
Forward Looking Commentary
EWS is up 12% year to date, but I believe the macro environment to be overall bearish for Singaporean equities. Until data is released that shows the slowdown of activity has bottomed, I expect higher risk aversion and more negative sentiment towards the market. China is a big part of this story. Considering the regional impact of the Chinese economy, investors should monitor Chinese economic conditions given the impact to trade and export demand for Singaporean companies. The U.S.-China trade dispute is still unresolved despite more recent headlines of a restart in negotiations, although my view is that the macro weakness in the region goes beyond the tariff impact. Despite the strength in global equity markets currently, I recommend taking a more cautious approach towards EWS.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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