The Financial Road to Singapore
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Looking over the financial landscape today it is obvious that we are entering a phase of capital flight from the West towards the East. It has been my contention that there are a number of recipients of this wealth transfer but the main ones at this point in time look to be Japan and Singapore. I’ve covered what I think it happening in Japan right now previously, but suffice it to say that I believe Japan is being upgraded to the status of a core economy rather than a fringe one, to use the terminology of Martin Armstrong. While I do not believe the U.S. has been downgraded to the status of a fringe economy by any means, the process of it happening has begun. We are in the very early stages of it occurring. Europe’s struggles are Act One, as it were.
So, with capital flying out of Europe and into the U.S. and Japan, a portion of that capital is also flying towards Singapore. A recent article about Singapore’s relative attractiveness as a safe haven for money over the tradition of Switzerland made a number of very important points in the city-state’s favor:
- Singapore’s corporate tax rate averages now just 17% vs. 21% for Switzerland
- Commodity traders can get a negotiated tax rate down to as low as 5% as opposed to the 10-12% that they will pay in Switzerland.
- Singapore is a trading hub for all of Southern Asia and as such has the infrastructure to house commodities..
Moreover, for investors there are no capital gains taxes in Singapore. None. Nada. Zilch. Asian companies, and Singaporean ones in particular, are very dividend-centric in how they reward shareholders. So, a 5% yield is a 5% yield. There is no 10-20% lopped off the top simply because you dared to make money investing wisely. The iShares MSCI Singapore Index ETF (NYSEMKT:EWS) paid a 4.1% yield in 2011, for example.
U.S. investors are staring a huge tax increase in January with the expiration of the so-called Bush Tax Cuts which will amount to the biggest marginal tax increase in the country’s history. Capital gains taxes will go back to 20% and taxes on dividends will go back to 15%.
Stop the Presses
Well, actually Singapore is one of those places where the printed news is still a profitable business and readership is growing, if only marginally. Singapore Press Holdings enjoys a near monopoly in print newspaper and magazine media in Singapore. With a market cap close to S$6 billion, print media still accounts for 75% of its operating revenue but none of its growth. Its property and internet business enjoyed 25% revenue growth in the 1st half of FY 2012. The internet business is in development phase as the operating margin for the division improved from a 51% loss in 2011 to a norrower 14.4% loss in 2012.
Property management is where they will make their money in the short term. Newspaper revenue was off 2% year over year but revenues from their investments in 2 major malls in Singapore accounted for nearly all of their profit growth in 1H 2012, increasing 42.5%. A 3rd project is in development for completion in 2016. This situation has prompted CIMB to recently state that Singapore Press Holdings is essentially an S-REIT at this point, and a very good one. For while their newspaper business is uninspiring from anything other than an income perspective, their property holdings are throwing off impressive returns with a very low cash call risk in the case of a global collapse in investment. The dividend yield for 2011 was 6.41% and looks to be comparable in 2012. This makes it a very attractive investment even versus other very strong S-REIT’s throwing off comparable or better yields.
Singapore oil rig construction conglomerate Keppel Industries, a major component of the Global X FTSE ASEAN 40 ETF (NYSEMKT:ASEA), itself trading at a forward multiple of 10.3 and paying a 4.3% yield has been spinning off its property holdings into the very successful K-REIT whose 8 properties are primarily A tier office complexes, and paid a 5.73% dividend in FY 2011. K-REIT’s properties are valued at more than S$6 billion.
Shop Smart Shop S-Bonds
Much like the drive by China to internationalize the Yuan by promoting Yuan-denominated Dim Sum bonds, the demand for Singapore corporate debt has skyrocketed in the past 12 months. Both Keppel and resort and gaming giant Genting have been the main drivers behind a 44% increase in corporate bond sales to S$15.7 billion. Singapore’s stellar credit rating along with its banks, which have not been subject to downgrades in spite of heavy exposure to European debt, has made it part of the safe harbor play in the mad dash for Tier 1 capital as this latest deflationary wave (wholly engineered by tight Federal Reserve monetary policy for the past year) continues. It’s not just Singaporean companies that are having an easy time raising cash, U.S. corporate paper ETF’s and ETN’s have seen huge in-flows this year. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEMKT: LQD) has seen its AUM surge by 13% since March 1st.
Net wealth in Singapore rose more than 8% in 2011 and the total net wealth of the island city-state is projected to grow by another 40% to $1.4 trillion by 2016. Not too shabby for a country of less than 6 million people with the world’s highest concentration of millionaires. Because the Monetary Authority of Singapore has followed the U.S. to zero-bound interest rates in order to manage the appreciation of the Singapore Dollar versus the U.S. dollar, capital fleeing Europe has to chase yield somewhere and the perpetual 5.125% coupon bonds from Genting and 10 year 3.145% coupon bonds from Keppel are looking very attractive.
The 10 year bull market of the Singapore Dollar versus both the U.S. Dollar and the Euro does not look to be in any danger whatsoever given the current circumstances. They may have to move proactively to stop the inflation being exported to them by the U.S., which is currently running at 5%, by raising interest rates. If that happens, the flight to quality that’s currently flowing will soon become a torrent.
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