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Singapore ETF in Focus as Economy Contracts in Q3


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Singapore’s economy contracted in the third quarter on a sequential basis and registered the slowest pace of year-on-year growth in more than seven years. A huge slump in manufacturing activity emerged as the main reason behind the sluggish growth rate. Though the monetary authority of Singapore (MAS) kept its policy unchanged, it is speculated that it may opt for easing in the days ahead to boost the economy.

Contraction in Singapore Economy

On a seasonally-adjusted basis, the economy contracted 4.1% in the third quarter from the previous quarter compared with 0.2% growth rate registered in the second quarter, registering the biggest decline in four years. This was the first time in the past five quarters that the economy entered into the contraction territory. Moreover, the economy expanded at only 0.6% during the quarter from the year-ago period, which was the lowest pace of expansion since the second-quarter of 2009 (read: Most Vulnerable Asia-Pacific ETFs on China Issues).

A weakening manufacturing sector primarily dragged down the economy during the quarter. The manufacturing sector contracted at a pace of 17.4% in the quarter from the previous quarter. Services activity, which accounts for 75% of the total economic activities, also registered contraction last quarter. The sector witnessed a negative growth rate of 1.9% in the quarter, which was also wider than second quarter’s contraction rate of 0.9%. Weak global growth was also cited as one of the major reasons behind the economy’s contraction during the quarter (read: 5 ETFs to Bank on as Global Growth Concerns Loom).

Separately, inflation rate continued to decline over a significant time frame. Since Nov 2014, the Consumer Price Index has declined every month. It declined 0.5% from the year-ago period in August. Low oil prices and a sluggish property market were one of the major reasons behind the declining inflation. Though MAS projects core inflation to be “around 1% in 2016 to 1–2% in 2017, the ascent will be gradual.”

MAS Keeps Policy Unchanged

The Singapore Monetary Authority, which uses currency as a key tool to ease monetary policy rather than interest rates, decided to keep the policy band for appreciation rate of Singapore dollar nominal effective exchange rate (S$NEER) at zero percent. MAS last eased the rate in April to zero percent appreciation rate from the prior target of a 0.5% annualized gain in the currency. Also, no changes were made to the center of the band or the width (read: Singapore ETFs in Focus Following Policy Easing).

The authority expects the policy to be ideal given the outlook for the economy and inflation. It expects that “a neutral policy stance will be needed for an extended period to ensure medium-term price stability.” It also added: “Growth in the Singapore economy has weakened and is not expected to pick up significantly in 2017. MAS Core Inflation will rise only gradually next year. Over the medium term, core inflation is still expected to trend towards but average slightly below 2%.”

Given the weak outlook, investors expect that MAS may opt for easing in S$NEER in the near-future to boost the economy. In this backdrop, the large-cap fund covering this economy’s equity market – iShares MSCI Singapore ETF (EWS - ETF report) – will be on investor radar in the days ahead. 

EWS in Focus

EWS is easily the most popular Singapore ETF on the market as it has about $561.6 million in AUM and an average daily volume of 1.1 million shares a day. The product charges 48 basis points a year from investors. With 28 stocks in its basket, this fund from iShares puts nearly 50% of its total assets in the top four holdings, suggesting higher concentration risks (see all Asia-Pacific (Developed) ETFs here).

The financial sector actually makes up roughly 38% of the portfolio, leaving around 18.3% for real estate followed by 17% for industrials. EWS pays a yield of 2.94% annually (as of October 14, 2016), implying that it may be an income pick if payout levels hold. The fund has a Zacks ETF Rank #3 (Hold) with a Low risk outlook.

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