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ETFs to Buy as Singapore's GDP Ticks Up

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Singapore’s economy grew more than expected in the first quarter, as strong manufacturing sector data drove the city state’s GDP. Coupled with strong inflation, recent economic data reports impelled the central bank of Singapore to tighten monetary policy for the first time in six years.

Into the Headlines

Singapore’s GDP grew 4.3% year over year in the first quarter of 2018, per advance estimates released by Singapore's Ministry of Trade and Industry. This was markedly higher than 3.6% growth in the final quarter of 2017 and also for the whole year.

Coming to GDP drivers, the manufacturing sector grew 10.1% year over year in the quarter compared with 4.8% in the previous quarter. Accounting for around 20% of GDP, the manufacturing sector is a key driver in deciding the city state’s fate. The services sector, which accounts for two-thirds of the economy, grew 3.8% year over year compared with 3.5% in the previous quarter.

However, construction remained a drag, as it contracted 4.4% year over year compared with 5% decline in the prior quarter. The weak performance was due to a decline in both private and public-sector construction activities.

The Monetary Authority of Singapore (MAS) decides on the monetary policy by managing the trade-weighted exchange rate index. It is the only country in the developed world that does not rely on short-term interest rate changes to conduct monetary policy changes.

MAS stated that it would slightly increase the slope of the Singapore dollar's exchange policy band from the current rate of 0%. This is expected to lead to a stronger Singapore dollar and the action is in line with central bank policy tightening in the rest of Asia.

Risks to the City-State

All in all, Singapore’s economy is on a strong growth trajectory. Being largely trade dependent, improvement in manufacturing sector significantly contributed to GDP growth. Although the global exports boom has benefited the city state, rising trade war fears between the United States and China might weigh on Singapore too (read: 5 Inverse ETFs to Make a Fast Buck on Flaring Trade Tension).

"Rising trade tensions between the major economies pose a downside risk to the growth outlook," MAS said in a statement. Although economists expect the so-called trade disputes fears to be settled behind closed doors, the volatile nature of the talks have somewhat unnerved investors (read: Trade Tensions or Not, Stay Safe with These ETFs).

We will now discuss a few ETFs providing exposure to Singapore (see all the Asia Pacific ETFs here).

IShares MSCI Singapore Capped ETF (EWS - Free Report)

This fund focuses on Singapore equities and is the most popular option for exposure to the economy.

The fund has AUM of $788.4 million and charges 49 basis points in fees per year. Financials, Industrials and Real Estate are the top three sectors of the fund, with 47.5%, 18.7% and 17.4% allocation, respectively. DBS Group Holdings Ltd, Oversea-Chinese Banking Ltd and United Overseas Bank Ltd are the top three holdings of the fund, with 17.8%, 14.1% and 12.8% allocation, respectively. The fund has returned 18.6% in a year.

We will now compare the performance of EWS to a broader South East Asian ETF, ASEA.

Global X Southeast Asia ETF (ASEA - Free Report)

This fund provides broad exposure to the five members of the Association of Southeast Asian Nations, namely, Singapore, Indonesia, Malaysia, Thailand and the Philippines. It is appropriate for investors looking for diversified exposure to South East Asia.

ASEA is less popular with AUM of $21.2 million and charges a fee of 65 basis points a year. From a geographical perspective, the fund has 30.7% exposure to Singapore, 22.3% to Thailand, 21.4% to Malaysia, 19.1% to Indonesia and 6.5% to the Philippines.  Financials, Telecommunication Services and Consumer Staples are the top three sectors of the fund, with a 47.9%, 13.7% and 7.9% allocation, respectively. DBS Group Holdings Ltd, Oversea-Chinese Banking Ltd and United Overseas Bank Ltd are the top three holdings of the fund, with an allocation of 8.8%, 7.3% and 6.2%, respectively. The fund has returned 24.1% in a year.

Below is a chart comparing the one-year performance of the two funds.

Source: Yahoo Finance

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