Buoyed by a strong
domestic economy, new economic drivers, liberalized immigration policies, an inflow of foreign funds, a rising property market and the potential of playing a leading role in Southeast Asia, the long-term prospects for traditionally “boring” Singapore have become very encouraging.

Singapore’s economy is expected to grow by 6% in 2006 and continue in the 5%-6% range over the next decade. Its average annual growth rate of about 8% over the past 45 years is impressive for any developed country; it is also higher than that of its more developed counterparts, including the U.S., Japan and Germany, whose combined cumulative annual growth averaged approximately 5% over the same period.

This steady economic growth is expected to contribute to rising GDP per capita, which is forecast at about US$28,000 in 2006 and at more than US$40,000 by 2015, making Singapore one of the richest countries in the world. Should the pace of growth continue, Singapore’s GDP per capita could rise by about 50% over the next decade, putting it alongside the U.S., Switzerland and Japan. And the beneficiaries of this growth would primarily be consumer and consumer-related sectors.

A strong, domestic economy of this magnitude would “boost the job market, real earnings, retail spending, demand for bank loans and the property market,” says a September report by Hong Kong-based brokerage CLSA Asia-Pacific Markets. “And the resultant effect should create long-term value for investors.”

As a result of all this, Singapore’s market capitalization should rise by 50% over the next five years and by 100% over the next decade to more than US$1 trillion, excluding new and overseas listings, adds the report, entitled The Red Dot Gets Bigger: Singapore’s story of perpetual reinvention.

The CLSA report goes on to say that Singapore has built a competitive advantage and is gaining a leading position in biomedical sciences, financial services (especially private banking) and exportable services such as information communications and media, environmental services, medical tourism, education, tourism, logistics and transportation. The country is also expected to remain competitive in traditional sectors — electronics, petroleum refinery and engineering.

The city state’s manufacturing sector is also competitive and is attracting higher levels of investment to support its expansion, says Charles Bastyr, portfolio manager at Toronto-based Meadowbank Asset Management Inc. “Contract manufacturing, construction of offshore rigs and oil refining should do well,” he adds.

Manufacturing as a share of GDP has risen steadily, albeit slowly, to 26.8% in 2005 from 24.7% in 1995, 21.7% in 1985 and 10.8% in 1960. Growth in manufacturing, in combination with developments in sectors in which it has a competitive advantage, should help Singapore sustain a healthy growth rate over the next decade.

Strategically, the country has targeted knowledge-based industries to transform its economy. Biomedical sciences, for instance, now complement the traditional labour-intensive chemical, electronics and engineering industries that have faced intense regional competition. Biomedical sciences — which includes drug manufacturing, medical technology and diagnostics equipment — have high barriers to entry because they are capital-intensive, thus reducing potential competition. To support development of this sector, Singapore has wooed several large drug companies, which have set up operations in the city state.

Another high-growth area is private banking. Singapore has become one of the fastest-growing offshore banking centres and is expected to benefit from the growing Asian private-wealth market. Singapore’s stringent banking-secrecy laws are comparable with those of Switzerland, which leads some analysts to believe Switzerland could lose its leadership role in this space to Singapore within the next decade.

Singapore is also vying to become the region’s major logistics and supply-chain management hub. (Most of the world’s largest logistics and supply-chain management firms operate out of Sin-gapore and are investing heavily to improve their operations.)

“Singapore is a port city, with the world’s busiest port,” says Chuck Wong, portfolio manager at Toronto-based Dynamic Funds Management Ltd. “It is one of the best-connected cities in the world, which bodes well for trade.”

The property sector is also set to do well, Wong says. It is being fuelled by a diverse range of foreign buyers, although the mass residential market is also recovering. “There have been strong moves in real estate, which will spill over to sectors such as construction, banking and retail spending,” says Mark Grammer, vice president of investments at Mackenzie Financial Corp. in Toronto.

@page_break@Fully integrated with the rest of Asia, Singapore is also a major beneficiary of intraregional trade and investing, especially with China, India and the Middle East. “Its pro-business policies, solid infrastructure and sound regulatory, legal and corporate governance framework are major attractions for businesses and investors,” Grammar says.

“The government has played a major role in initiating reforms, developing infrastructure and establishing good business conditions,” adds Wong. “It has created a transparent, competitive environment that builds shareholder value.”

Singapore’s corporate and individual tax rates are among the lowest, and the city state is widely regarded as one of the best places to live and invest. Paris-based Transparency International ranked Singapore as the world’s fifth least corrupt country last year, while the World Economic Forum placed it sixth on its 2005 growth competitive index and fifth on its business competitive index.

Singapore’s favourable business environment has allowed it to benefit from US$65 billion in aggregate foreign direct investment over the past five years, more than the combined inflows into Malaysia, Thailand, Indonesia, Philippines, India and Taiwan. Only China and Hong Kong have received more FDI in the period.

Singapore’s barrier to moving forward is its small population and shortage of talent, says Bastyr. With a population of only 4.4 million at the end of 2005, Singapore relies on non-residents to fulfil its demand for skilled labour, and attracting foreign talent has been part of the government’s drive to diversify the economy. One-quarter of the population are non-Singaporeans; immigration policies are designed to increase this share by 2015, when the population is forecast to grow to 5.3 million.

Another weakness is Singapore’s dependence on trade. (It has the world’s highest trade/GDP ratio.) “This makes trade sensitive to changes in the U.S. dollar, even though the Singaporean dollar is not pegged to the US$,” says Grammer.

Permits are not required for imports and exports, and all goods (except liquor, tobacco, motor vehicles and petroleum products) are exempt from duties. Nonetheless, as a trading hub, this weakness could have positive implications for exports. Singapore currently has at least 10 free trade arrangements with trading counterparts and is negotiating another 15 arrangements.

Singapore is also vulnerable to competition from India and China, which may attain maturity in certain industries in which Singapore now has a competitive advantage. In this case, it will not be able to compete on cost and efficiency, but on proprietary knowledge.

Singapore is a relatively stable investment opportunity, Wong says. Over the one-, three- and five-year periods ended Oct. 9, the MSCI Singapore index was up 22.2%, 16.6% and 16%, respectively, in US$ terms. In comparison, the MSCI world index was up 16%, 13.3% and 8% over the same periods.

According to CLSA, firms that could benefit from emerging trends in Singapore are domestic-consumer and asset-reflation plays such as banks and financials, property developers and companies with direct exposure to such growth sectors as biomedical sciences, tourism, transport and logistics, medical tourism, environmental services and education. Stocks in these sectors “will probably have a superior earnings-growth trajectory and greater upside than our overall 50% upside expectation of the broader market,” the report says. (Bastyr also likes contract manufacturing and financial services, while Grammer favours real estate and service firms.)

Investors wanting to take advantage of opportunities in Singapore can invest in mutual funds with strong exposure to this market. According to www.globeadvisor.-com’s ProStation, 18 funds belonging to seven fund families — among them AGF Funds Inc., Mackenzie Financial Inc. and Investors Group Inc. , have an exposure of 10% or more to Singapore.

Investors can also invest in Singapore American depository receipts trading on U.S. stock exchanges. The Bank of New York’s Singapore ADR index lists 25 companies in a range of sectors.

Singapore is reinventing itself. Its government, which runs the city state like a company, is taking appropriate measures to create a business- and investor-friendly environment. As the CLSA report’s title implies, this small red dot on the map of Asia is about to get a lot bigger. IE