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Emerging markets are out of favor this year with heavy losses piling up in the space. The biggest bump was seen recently on increased chances of the Fed tapering QE3 and its impact on emerging market capital flows (read: 3 Currency ETFs Hit Hard By Taper Talk).
Additionally, the widening current account deficits, rising inflation, sluggish export and political disorder are dulling the appeal of emerging markets. The rising U.S. Treasury yields and the threat of turmoil in Syria spilling over have added further woes to these nations. These trends have pushed investors out of the emerging market securities, especially the currencies.
As such, emerging market currencies and related ETFs have been plunging against the U.S. dollar and other developed market counterparts. Among these, Asian currencies like Indian rupee, Indonesian rupiah, Brazilian real and Thailand baht have been the worst hit by this trend (see: all the currency ETFs here).
The news has also hurt developed market currencies in the region, such as the Singapore dollar. This currency is heavily dependent on trade, so weakness in some of its key neighbors can have a negative impact on this city-state.
In such a backdrop, the Singapore dollar, as represented by the CurrencyShares Singapore Dollar Trust (FXSG) is also bearing the burnt, having fallen more than 2% in August. This slump has led to widespread concerns about whether the currency ETF would rise on the recovering global economy or if it will follow its neighbors.
Basically the movement of the any country currency depends on its economic growth prospects. So, let’s dig into the Singaporean economy and its growth prospects in detail to find the answer (read: Inside The Only Singapore Dollar ETF (FXSG - ETF report)).
Singaporean Economy: Bright Spot
Singapore – the business hub of Southeast Asia – appeared back on track in the second quarter buoyed by a series of solid economic data that suggested bad times might be over for this nation.
The economy rebounded nicely after the slowdown in the last two years, posting growth of 3.8% year over year in the second quarter. This marked the strongest growth in three years and a remarkable improvement from 0.2% growth in the first quarter.
This impressive performance was mainly driven by an unexpected surge in the manufacturing and service sectors. The manufacturing sector grew 0.2% against 6.7% contraction in the previous quarter while the service sector rose from 2.7% to 5.5% in the second quarter (read: Are Singapore ETFs Back on Track?).
Based on the recovering economy, the Singaporean government lifted the growth outlook from 1–3% to 2.5–3.5% for this year and the central bank slashed its inflation forecast for 2013 to the range 2–3% from 3–4% predicted previously. As such, the nation is seemingly recovering from the twin attacks of slow growth and heightened inflation.
Further, the nation is running at low inflation (1.6% in Q2), impressive unemployment (2.1% in Q2) as well as strong trade surplus (19% of GDP) compared with many of its neighbors that made it a compelling choice for investment.
Being a trade dependent economy, Singapore’s growth is vulnerable to the declining exports to Europe, Asia and the U.S. A sharp slowdown in China's economy, continued weakness in Europe and the imminent winding down of the massive U.S. economic stimulus measures would remain the major headwinds to exports and economic growth in the second half of the year (read: 4 Outperforming ETFs Leading Europe Higher).
The biggest risk to the country’s growth story is the possible housing bubble. The household debt and property prices are rising at an unprecedented level, posing significant threat to the country's financial system. The Singapore household debt increased from 64% of GDP in 2007 to 77% of GDP currently, just behind South Korea (88%) and Malaysia (80.5%).
However, unlike America or Japan, this situation seems under control, with the government taking several steps to cool down property market and safeguard households from being over leveraged.
FXSG in Focus
For investors looking to target the currency, a look to FXSG is a good idea. The product looks to track the price of the Singaporean dollar, net of expenses, which is 40 bps a year.
The ETF provides long exposure to the Singaporean dollar, appreciating when the currency goes up against the U.S. dollar, and down when Singapore’s dollar declines against the American currency (see more in the Zacks ETF Center).
However, investors should note that the product is still quite young (debuted in February this year) having accumulated only $7.8 million in its asset base and trading in a paltry volume of below 3,000 shares per day. FXSG is down 3.5% since inception.
The Singapore currency ETF has shown strong resilience despite the rout in many of its neighbor currencies, suggesting it is unlikely to follow its emerging market peers given a relatively strong economy and current account surplus (read: 3 Currency ETFs Crushed in Emerging Market Rout). Recovering global economies, particularly the Singapore trade partners would add to future growth.
Apart from these, the Monetary Authority of Singapore (MAS), the nation’s central bank, controls the Singapore dollar and ensure its trading within the tight range policy of 0.02%. This limits the pronounced movements in the currency and likely protects it from broad market sell-offs, suggesting FXSG should remain a stable pick, and that it will not follow its neighbors lower in the in the months ahead.
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