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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Sell Singapore, Buy Sri Lanka - says Fraser Dinnis

Sell Singapore, Buy Sri Lanka - says Fraser Dinnis

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StockGuru

StockGuru
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Courtesy: http://seekingalpha.com/article/2305515-sell-singapore-buy-sri-lanka?page=2

Summary

Singapore is showing signs that its extraordinary growth of recent years may be reaching an end as it reaches its 50th birthday.
Sri Lanka is putting in place a strong foundation upon which rapid economic growth can be achieved.
2 island nations with strategic locations and significant Chinese investment but high economic growth is more likely in Sri Lanka over coming years than in Singapore.


Why on earth should any sensible investor consider such a trade recommendation? Singapore is a modern peaceful country envied internationally for many areas from finance to education to logistics. Sri Lanka known chiefly for cricket, tea and a horrid civil war! Surely comparing these countries is like comparing apples and oranges?

Let's go back to 1956 when the father of Singapore, Lee Kwan Yew first visited Colombo, the capital of Sri Lanka. A mere 9 years before Singapore independence, LKY stated that Singapore should aspire to being like Colombo. It had 2 universities, foreign exchange reserves, a strategically critical location and enviable infrastructure owing to its position as a key Allied HQ during the war compared to Singapore which had been occupied by the Japanese.

Step forward to today and it is Singapore that has the foreign exchange reserves, amazing infrastructure, world renowned education and it is Sri Lanka that is recovering from a period of war, a civil war between the Sinhalese majority and the Tamil minority located in the North of the island.

However, as any sensible investor knows, in deploying capital, it is not the past that is important, but the future. As Singapore reaches the ripe old age of 50 next year, it seems likely to be Sri Lanka's turn to produce the economic growth over the next 50 years that Singapore has produced since independence in 1965.

Singapore - Short term weakness or Long-term decline?

In 2015, Singapore will celebrate its 50th birthday unsure whether it is about to endure a major political upheaval. The general election of 2016 has the potential to rock the People's Action Party ('PAP'), the party of Lee Kwan Yew that has dominated Singaporean politics since 1965. The last general election in 2011 saw the party lose a General Representation Constituency ('GRC') for the first time (to the Workers Party). A GRC is a larger constituency that elects a slate of MPs from the same party. Moreover, the PAP overall share of the vote fell to just over 60%.

This was generally viewed as a wake up warning for the PAP, but since then, there are many signs that discontent in the country has increased and economic factors are contributing to build further discontent. Questions are being whispered as to whether a bigger political avalanche could be coming at the next general election in 2016.

1. Singapore is now the most expensive city in the world. According to the Economist Intelligence Unit, the cost of living in Singapore has soared. This is felt on a daily basis by locals and expats alike who are paying more for every day expenses from food to travel.

2. Singapore is increasingly crowded. The population has increased from 3 million in 1990 to its current level of nearly 5.5 million. During that time, the number of foreign permanent residents has increased from 112,000 to 531,000 and the number of foreign employees on a temporary work visa from 311,000 to over 1.5 million.

3. Car ownership in Singapore is now exclusively a luxury. The complex system of ownership now means that if you can afford a car, you may as well buy a luxury car. In 1990, there were 5 times as many small (under 1,600 cc) cars available for sale as larger ones. Today, bigger cars dominate. The largest selling car brand in Singapore in the first quarter this year was Mercedes Benz with BMW at #3.

These factors are contributing to a sense of resentment that ordinary Singaporeans are no longer being placed first by the Government. This is undoubtedly the most common coffee shop conversation in the city at the moment. However, it is not just locals that are suffering.

4. Foreign businesses and business people are leaving Singapore. Despite official statistics, expats in Singapore will assure you that people are leaving Singapore at a much higher rate than ever before. The evidence comes from their professional lives but more importantly from their children's schools and social activities that are experiencing unparalleled turnover. One relocation agency reports a 3-fold increase in business supporting departing families in June 2014 compared to June 2013. There is also plenty of anecdotal evidence that foreign companies are struggling to attract senior foreign talent to locate in Singapore.

The real estate market, a key barometer of sentiment across Asia, is also showing concerning signs.

5. Housing rental yields are collapsing. Whilst official figures point to a 'softening', the specific evidence is of rentals being offered 30-50% lower than 2 years ago.

6. House prices are falling. Official figures show 3 consecutive quarters of decline. So far in 014, prices have fallen 1.1% in Q2, and 1.3% in Q1. Whilst not dramatic, once again, specific evidence is that sellers that need to sell are having to accept much more dramatic reductions and even new condos are being offered at discounts in excess of 10%.

7. The 'Chinese factor' of buying properties for investment but leaving them empty is resulting in a large stock of housing that lies empty. This is all potential supply that still has to be launched into a declining rental or sale market.

This last point about the 'Chinese Factor' is a key issue. In the past, expat talent was largely productive, attracted by jobs or the opportunity to build businesses in a key economic hub. This lay at the heart of Singapore Government Policy. Such expats are being replaced by mainland Chinese investors whose primary focus is moving portfolio investment offshore and hence is less accretive to the economy.

8. Volume on the Singapore Stock Exchange has collapsed to around $1 billion, over 40% down year on year and Moody's continues to warn of pressure on the credit ratings of Singapore banks.

So the big question is whether Singapore has reached the peak of its potential, at least for the time being? Has being declared the most expensive city in the world heralded a 'top' for Singapore that is now about to be followed by a period of consolidation or even decline. It is this correspondent's belief that the growth story of Singapore has ended and investors need to look for its successor. The answer seems to lie across the Indian Ocean in a country that showed such promise 50 years ago.

Sri Lanka - The New Island of Growth?

Sri Lanka's nickname is the 'Teardrop Isle'. For many years, this was appropriate not just because of its shape, but also because of the tears shed during a brutal civil war that lasted from 1983 to 2009. However, over the past 5 years, a transformation has taken place around a country which promises so much.

1. Sri Lanka occupies a strategic location adjacent to the main East-West sea lane. Literally every oil tanker and container vessel travelling from Europe and the Middle East to East Asia (and back) has to pass within a few kilometres south of Sri Lanka. The country is planning to take advantage of this strategic location by expanding its Southern Port at Hanbantota and at the capital city of Colombo.

2. The country has built new expressways linking Colombo with the key tourist destinations of the South and on to Hanbantota as well as with the international airport. Further expressways are planned linking Colombo with the North and East.

3. Power generation has been expanded with the building of 2 coal powered stations (900 MW in total) and a 150MW hydro project.

4. Over 450 acres of land is being reclaimed from the sea adjacent to downtown Colombo to created 'Colombo Port City' in a $15 billion project.

5. The enormous tourism potential of the country is being supported by new hotel. Amongst international brands opening in Sri Lanka Shangri-La Hotels are building 2 hotels totaling 800 rooms, Hyatt is opening a 550 room hotel, Marriott is building a 200 room hotel and Crown Casino will open a 450 room integrated resort (another 800 room casino linked resort being built by John Keels). However, this is only a small portion of the expansion of Sri Lanka's tourism sector which counts local and regional brands as well as a wealth of boutique and villa hotels.

Tourist numbers are increasing by over 20% per annum and the national airline has recently joined the One World Alliance. The international airport at Colombo is being upgraded and a new international gateway in the South of the island was recently opened.

6. Sri Lanka is the world's second largest tea exporter and the fourth largest producer of tea. However, a lack of branding has left profits lying in international hands. Moreover, its variety of climates from the tropical coasts to the cooler highlands permits many other agricultural products to be grown.

7. Sri Lanka enjoys a wealth of natural resources. Minerals include mineral sands deposits of the North and some of the best large flake graphite so critical for the new super nano-material known as graphene to a multitude of gems, most notably sapphires which are reputed to have the best colour and clarity of any found in the world. A Sri Lanka Sapphire was featured in Kate Middleton engagement ring that was previously owned by Princess Diana.

8. Sri Lanka has identified offshore resources of oil and gas which is now attracting interest from exploration and production companies.

9. Whilst the low paying garment and textile industries remain strong in Sri Lanka, the higher value software and business processing industries are expanding strongly with export revenues in this area up from $213 million in 2007 to $600 million in 2013 and having a target of $2 billion by 2030.

Whilst the potential of the country is clearly high, it may come as a surprise that so much has been achieved in such a short period of time since the end of the civil war? The answer is the China Factor! Whilst Chinese investment may be one of the factors now hurting Singapore, it has certainly propelled Sri Lanka and looks destined to continue to support the island's expansion.

China recognised the strategic importance of Sri Lanka and has been the largest investor in its infrastructure expansion. Of course, this has led to tension with India, for whom Chinese influence is less attractive. However, the Sri Lankan Government of President Rajapaksa has embraced Chinese investment whilst trying to reassure India that its intentions are not inconsistent with maintaining close links to its neighbour. It isn't just money that is flowing from China either, tourists from China increased 137% in the first half of 2014 to over 52,000.

Trading the Divergence

Despite the collapse in trading volumes, the Singapore Stock Exchange still dwarfs the Colombo Stock Exchange which only has daily trading volume of around $8 million covering 293 listed companies. Foreign exchange controls still make Sri Lanka a tougher place to deploy capital than the laissez faire environment of Singapore, but foreign investors remain the key factor in the local stock market being net buyers of Rupee 5.2 billion (US$40 million) of stocks. However, this remains a 'frontier market' for share investors.

A number of fund management houses offer Sri Lankan country funds. Perhaps ironically, the largest fund is registered with the Singapore Monetary Authority. However, individual stocks listed overseas that offer access to Sri Lankan expansion are currently almost non-existent. An ETF doesn't currently exist though some Sri Lankan exposure is available in the iShares MSCI Frontier 100 (NYSEARCA:FM) (though heavily diluted by other countries).

From this perspective, portfolio investment into Sri Lanka remains challenging for many. However, as awareness of the country's potential and indeed its actual current growth expands, it is likely that the direct investment in real estate, the strategic investment in tourism, energy, agriculture and minerals and other private equity investments will be joined by internationally listed opportunities for international investors to participate.

Conclusion

Singapore's reputation for its rule of law and fairness will not be matched by Sri Lanka for many years to come. Many will also be concerned by continuing investigations into the approach taken by the Sri Lankan government in ending the Civil War and by allegations of corruption within the country.

However, the question has to be posed. If the past 50 years belonged to Singapore will the next 50 years belong to Sri Lanka? At least today, it seems likely that at least for the next few years, the growth opportunities are more likely to lie in the Indian Ocean than in the South China Sea.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Comments

rhmayo
Comments (2)| + Follow | Send Message  
The country has significant potential provided the Sinhalese majority learn to be inclusive, generous without putting their big egos on their sleeves. Wishfully the get the wisdom that petty nationalism is robbing them of a great future and success.
9 Jul, 08:48 AMReply! Report AbuseLike0

SL king
Comment (1)| + Follow | Send Message  
Looks like LTTE terrorists and their supporters are interested in reading about Sri Lanka and to write comment.
11 Jul, 07:23 AMReply! Report AbuseLike0

Fraser Dinnis , Contributor
Comments (12)| + Follow | Send Message  
Author’s reply » rhmayo, I agree with you on this point. Unfortunately, petty nationalism is an unwelcome trend which is all too apparent in many parts of the world today. However, my hope is that Sri Lanka can buck this trend. Only time will tell and my sense is that whilst such inclusion is necessary if Sri Lanka is to dominate the next 50 years, the next 5 years will see continued economic progress no matter what.
9 Jul, 09:15 AMReply! Report AbuseLike0

Northwest Investor , Contributor
Comments (1326)| + Follow | Send Message  
The Buy on Sri Lanka is a good thought-- the "sell" on Singapore less compelling. Think about just how cheap Singapore is already trading, and the ambition and reach of Singapore companies. Singapore Telecom, for example, has interests throughout Australasia.

And for me, the most compelling part of a Singapore investment is that its one of the cleanest, least corrupt nations in the world. Given just how dicey the corruption issue is in Malaysia, Indonesia, Vietnam, China-- the ability to invest with high quality managers and know that you're actually getting the deal you thought you were getting: that's a big plus for Singapore.

The crowding and discouragement of auto ownership are not bad things IMO. Singapore is a planned, 21st century city state-- cars don't play a big part in that design, and for good reason. Traffic jams are dirty, a waste of resources. Singapore is quickly becoming the "high quality, high integrity, high knowledge" powerhouse of Asia. St Elizabeth's Hospital gets paying patients from all over Asia, for example, and Singapore banking has all kinds of opportunities for growth as well.
9 Jul, 11:54 PMReply! Report AbuseLike0

Fraser Dinnis , Contributor
Comments (12)| + Follow | Send Message  
Author’s reply » Northwest,

I have no argument with you regarding the excellent systems and reputation held by Singapore, However, one has to consider whether the country has peaked or whether it promises further growth. Right now, from my vantage point (I have lived in Singapore for 14 years), it seems that a peak may have been reached.

As for the ambition of Singapore companies, that is a big issue that cant be covered in a short reply. Your example of Singapore Telecom's international interests is certainly correct, but my question to you would be after Thailand India and Australia (their biggest overseas investments) where next for their growth to be sustained?

Think you are referring to Mount Elizabeth (Parkview is the owner). Absolutely excellent hospital as are its sister hospitals at Novena and Gleneagles etc. However, once again, I pose the question about where growth is going to come next? Mt Elizabethe Novena is brand new, a fantastic facility but probably only running at around 20% capacity.
11 Jul, 08:43 AMReply! Report AbuseLike1

Northwest Investor , Contributor
Comments (1326)| + Follow | Send Message  
Thank you for the local view . . . yes, Mt Elizabeth is what I meant. And yes, its of concern when someone an ocean away is more bullish than a local!

My thesis is relatively simple: the market has discounted China-world share values because of lack of transparency. Look at Alibaba, for example-- and just how much wealth got lifted from Yahoo and Softbank by Jack Ma & Co.

IMO there's a "heads I win, tails you lose" discount being built in to China shares-- and makes Singapore's lack of corruption a mis priced asset; if you've got a reliable partner at 14 times earnings, and an unreliable one trading the same-- which should you buy? Now Shanghai is now trading cheaper than that-- under 10x, to my mind a measure of just how uncomfortable investors are with the rules of the road on the mainland.

Singapore represents an alternative vision, one which was attractive to many Chinese (not least, Deng Xiaoping).

My guess is that Singapore will end up filling their hospitals with folks who're picky about the provenance of their implants, and the credentials of their surgeons; but its troubling that it hasn't happened yet-- %20 capacity isn't just disappointing, its terrible.

I look forward to more from you; great to hear from a local. Do you have any feeling about Vietnam? It seems to have some of the upside of Sri Lanka, but with more easily accessed investment options.
13 Jul, 03:51 PMReply! Report AbuseLike0

Fraser Dinnis , Contributor
Comments (12)| + Follow | Send Message  
Author’s reply » Note that Mt Elizabeth Novena is relatively new. Their established hospitals are packed full!

With regard to governance and transparency, I agree with you about their value. Singapore's stock exchange has suffered in the past from letting smaller Chinese companies list (so called 'S' shares) and then watch as they ignored the basic standards that would be expected of a listed company. The SGX recognised the importance of maintaining their reputation and has tightened up the rule book.

With regard to Vietnam, this has to be perceived carefully and in a totally different way than Sri Lanka. Remember that over the last few years, the country experienced large corporate defaults and a currency crisis, both of which negatively impacted investor perception in a significant way. There is no question about the potential of Vietnam, but the country has many challenges along the way. Maybe the subject of a future article.
14 Jul, 09:17 AMReply! Report AbuseLike1

rajikanth@live.com
Comments (2)| + Follow | Send Message  
Interesting Article about Sri Lanka!
11 Jul, 02:40 AMReply! Report AbuseLike0

rajikanth@live.com
Comments (2)| + Follow | Send Message  
Publish
11 Jul, 03:43 AMReply! Report AbuseLike0

janaka28@yahoo.com
Comment (1)| + Follow | Send Message  
On the back of increasing Chinese investments in Sri Lanka, both countries are now in the final stages of signing a free trade agreement with China. This will gives Sri Lanka access to huge market in China which investors could exploit by setting up companies in Sri Lanka which has good labour force and improved infrastructure facilities. We need to sort out rule of law issue and put in place good governance model sooner than later
11 Jul, 07:24 AMReply! Report AbuseLike0

Fraser Dinnis , Contributor
Comments (12)| + Follow | Send Message  
Author’s reply » Janaka

It is interesting that Sri Lanka will become one of the few countries with preferential trade agreements with both India and China (as well as others such as Pakistan).

Governance is become critical for international capital so totally agree with you here.
11 Jul, 08:36 AMReply! Report AbuseLike0

Asia Frontier Capital
Comments (27)| + Follow | Send Message  
Excellent researched article. In our view Sri Lanka has the potential to become a hub for the Indian Subcontinent like today "Hong Kong is for China" or "Singapore for Indonesia/Malaysia". There is an enormous potential with neighboring countries like Bangladesh, India, Maldives and Pakistan which have a combined population of more then 1,5 billion people.

Read also AFC's Sri Lanka travel report:

http://seekingalpha.co...
11 Jul, 09:53 AMReply! Report AbuseLike0

pantherdoc
Comments (209)| + Follow | Send Message  
Great article and comments. But, I don't see a pure play investment.

Perhaps Wisdom Tree could put together a "Promising Island Nations Fund" (ticker: PINF) It could even be hedged for sand dollars.
23 Jul, 03:25 PMReply! Report AbuseLike0

3259
Comments (20)| + Follow | Send Message  
Don't know about specific stocks in in Singapore; however, from a valuation standpoint isn't the Singapore market a decent buy right now? See http://bit.ly/1pAZzJ4 ... from a market cap to GNP standpoint, which is endorsed by Buffett as a valuation metric, Singapore appears to have one of the more compelling market valuations in the world. Would like to get the author's comments on this.
5 Aug, 01:47 PMReply! Report AbuseLike0

User 23241483
Comment (1)| + Follow | Send Message  
With population pressure and rising inequality, politics of Singapore is changing. PAP is feeling the heat and they are responding quickly. The result is tougher requirements for white collar expats to become Singapore residents (a key draw for many regional expats from India and China). With FATCA in force, bank secrecy will decline over time but only in the long term. It is also becoming a hub for elite schools and colleges for region's elite and political class. Cost of living is a real issue. But SG govt is run by really smart and far-sighted leaders who are keen learners of macro trends. Rise in US interest rates will likely cause a corresponding rise in SG interest rates (weak SGD causes inflation b/c everything is imported) and this will cause problems in the housing market. Buying Sri Lanka appears possible good only in theory. Given the low volume, FX controls, poor corp governance, it seems nearly impossible to deploy any meaningful capital. One should watch that space.
6 Aug, 01:20 AMReply! Report AbuseLike0

Fraser Dinnis , Contributor
Comments (12)| + Follow | Send Message  
Author’s reply » 3259. I can imagine that we could have a comprehensive discussion on the application of valuation metrics to smaller markets such as Singapore compared to far more substantial markets like the US. The reality is that the Singapore market is remarkably narrow based amongst few stocks with the vast majority being highly illiquid. You also have to take into account the government ownership (including SWFs such as Temasek and their ilk) that hold dominant shares in many of the blue chips.

Then you need to take into account the leveraged impact on a withdrawal of liquidity to smaller markets such as Singapore. Certainly the government linked stocks may be more protected, but the smaller and less liquid stocks can suffer tremendously from a change in the liquidity characteristics of the market as a whole.

I could go on into more detail about analysing stocks that whilst listed in Singapore, have little relationship with the country. The so called 'S' shares for example which were basically Chinese companies seeking an overseas listing.

I am concerned about Singapore (more of which below in my response to User 2321..... ) but the point in my article was not so much a bear case for Singapore as much as a concern that Singapore had to be evaluated differently and that a country such as Sri Lanka would offer a more compelling growth story in the future.

I can sense further articles about Singapore coming soon from me!
6 Aug, 08:14 AMReply! Report AbuseLike0

Fraser Dinnis , Contributor
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Author’s reply » User 23241483 My response is not to argue with the many positive comments about Singapore, but simply to point out that these have been built into expectations and are historic in nature. I hope that you are correct about the Government's ability to respond in an appropriate fashion, but I think that you would agree with me that there are strong elements in Singapore public opinion that are more doubtful about this response than was the case in the past. This creates a risk factor that has not existed before.

Your observations about Sri Lanka are also reasonable. As I admitted in my article, we are talking about 2 very different markets and a straight switch is not possible for many institutional investors. However, for those who are simply 'seeking alpha', my sense remains that as a growth story, the next 50 years (and probably a far shorter time frame) will show greater returns for Sri Lanka than Singapore.

Sri Lanka has a long way to go, and investment in the country will not be for everyone. Any investor absolutely has to be concerned with corporate governance and corruption and all the other perils that accompany what are generally referred to as 'frontier markets'. However, the ability to analyse, measure and deal with such things are why I hope investors will pay people like me me to help them reduce risk whilst achieving the potential returns.

Ironically, the corporate governance principles and legal system of Singapore will be supportive in directing capital into Sri Lanka. This will be a benefit for Sri Lanka that Singapore didnt have!

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