Singapore represents a promising investment opportunity for individuals who want to gain exposure to a unique emerging market in Southeast Asia. Understanding the upsides and downsides of investing in Singapore can help you make a more informed choice about whether to make it a part of your portfolio.
- Singapore is best known in the investment community for its participation in global trade as one of Asia's largest trading hubs.
- It has a robust free economy but is susceptible to slowdowns because of its dependence on global trade.
- ETFs offer the simplest investment opportunity in Singapore.
Overview of Investing in Singapore
Located on the Malayan peninsula, Singapore is a maritime center linking over 600 ports in 120 countries. Its strategic location allows it to serve as a headquarters for 37,000 international companies. The country's robust financial markets have become a key source of funding for a total market of four billion people within a seven-hour flight radius.
Singapore attracts foreign investors for several reasons.
It contains thriving trade and financial sectors. Singapore has an extensive trade network amounting to over 25 free trade agreements, including 15 bilateral agreements and regional agreements among 15 countries as of January 2021. The country also ranked as the fifteenth largest export economy and the sixteenth largest importer in 2019. Its stock market, the Singapore Exchange Limited, has a market capitalization of around $7.9 billion as of February 2021.
It boasts a pro-business environment. Its low corporate tax rate of 17% and low level of corruption, a product of anti-corruption laws and audits, have made it home to around 7,000 multinational corporations. More than half of Asia’s multinational corporations locate their regional headquarters in Singapore.
It has a skilled workforce. Singapore ranked second worldwide, and first among countries in Asia, in ability to enable, attract, grow, and retain highly skilled workers, in a study of 25 countries by KDM Engineering in 2017. More than half of the labor pool comprises white-collar workers.
It features advanced infrastructure. Singapore has highly developed physical transportation, including over 100 airlines connecting about 80 countries. Its digital infrastructure is also superlative, offering broadband coverage to over 99% of the country.
Benefits and Risks of Investing in Singapore
Singapore has one of the world's richest populations, favorable demographics, and a growing economy, but its focus on trade leads to some degree of economic dependence on global foreign trade that should be factored in before you make an investment decision.
Benefits of investing in Singapore include:
It has favorable demographics. Singapore is the third-richest in the world based on GDP per capita purchasing power parity, as of 2019. It also has one of the largest concentrations of millionaires and one of the lowest unemployment rates among developed countries.
It boasts a free, diverse economy. Singapore is considered to be one of the freest global economies and one of the easiest countries in the world in which to conduct business as a result of its business-friendly regulations. In addition, its economy boasts diverse verticals including shipping, finance, tourism, and pharmaceuticals.
Risks of investing in Singapore include:
It is reliant on foreign trade. Singapore's economy is heavily dependent on foreign trade, which led to a contraction during the 2001 bubble and 2008 financial crisis, but the country was quick to rebound.
It has a strong connection to China. Singapore's economy is highly interconnected with China's economy given the nation's significant capital. This connection has proven to be disadvantageous in recent years, as China's economic growth has gradually decreased since 2011.
Singapore Investment Opportunities
You can gain exposure to the financial markets in Singapore by buying exchange-traded funds, closed-end mutual funds, or American Depositary Receipts (ADRs).
Invest in Singapore With ETFs
The easiest way to invest in Singapore is with exchange-traded funds (ETFs), which offer diversified exposure to the country in a single U.S.-traded security. One of the most popular ETFs chosen for investing in Singapore is the iShares MSCI Singapore ETF (EWS), which has a net asset value of more than $650 million and holds 19 different securities spanning medium and large companies, as of February 2021
Since Singapore is primarily a trade destination, the ETF is heavily weighted towards financial (49.06%), real estate (22.97%), and industrial (11.14%) companies. Investors should be aware that this overweight position could result in added risk if one of these sectors (for example, the financial system) was strained.
Buy Closed-End Mutual Funds
Unlike ETFs, these funds can trade at a premium or discount to their net asset value. However, closed-end mutual funds offer limited shares, unlike open-end mutual funds. Investors can, for example, purchase the Aberdeen Asia-Pacific Income Fund, Inc. (FAX), a closed-end mutual fund with a market capitalization of over $1.1 billion as of February 2021. This fund invests in the debt securities of countries including Singapore, China, Indonesia, India, and Australia.
Closed-end mutual funds are different from closed mutual funds, which are actually open-end funds that are closed to new investors.
Invest With ADRs
Finally, investors can purchase ADRs, which are certificates representing shares in foreign firms. You can trade ADRs on U.S. stock exchanges, but they tend to be riskier than ETFs and mutual funds since they offer less liquidity and diversification.
Final Thoughts on Investing in Singapore
Investors should carefully weigh these pros and cons before making an investment decision. Economic downturns are difficult to predict, especially in emerging markets, which tend to be a bit more volatile than developed markets. To hedge against risk, make any investments in Singapore a single part of an otherwise diversified portfolio.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.