- The Singapore stock market offers a great example of where loose monetary policy has failed to prevent prospective returns from rising to attractive levels.
- The country outsources its monetary policy to the U.S. so should be attractive to investors looking to buy stocks as a way of benefitting from easy Fed policy.
- The dividend yield is 4.0 percentage points above 10-year Treasuries with the potential for dividends to recover from the Covid-induced crash.
- The Singapore economy has been hit hard by the global lockdowns but from a long-term perspective the island state boasts one the most stable economic, political, and business environments in the world.
We have written on numerous occasions about the misplaced faith investors have in the ability of monetary policy to support U.S. stocks. Low bond yields do not tend to prevent equity valuations from falling to levels that imply strong forward-looking returns. The Singapore stock market offers a great example of where loose monetary policy has failed to prevent prospective returns from rising to attractive levels.
The country effectively outsources its monetary policy to the U.S. and so any investors looking to buy stocks as a way of benefitting from the impact of the Fed’s loose monetary policy could do worse than investing in the iShares MSCI Singapore Capped ETF (EWS). The dividend yield is 4.0 percentage points above 10-year Treasuries with the potential for dividends to recover from the Covid-induced crash.
MSCI Singapore Dividend Yield Vs 10-Year UST Yield
Source: Bloomberg
Long-Term Macro And Political Risk Is Minimal
The Singapore economy has been hit hard by the global lockdowns but from a long-term perspective the island state boasts one the most stable economic, political, and business environments in the world. High levels of public and private savings have enabled the country to amass huge levels of net international assets equivalent to around 300% of GDP. Together with a strong commitment to economic freedom and a high degree of social stability, this suggests the economy will be able to adapt to new global economic challenges as well as any. It also suggests that we should see gradual Singapore dollar appreciation over the long term.
A Large Margin Of Safety
Despite the country’s economic stability, its stock market is among the most undervalued in the developed world. The MSCI Singapore trades at 0.97x book value and offers a dividend yield of 4.7%. Not only are these metrics attractive by international standards, they are also attractive relative to the index’s own history as the chart below shows.
MSCI Singapore Dividend Yield And Price/Book Ratio
Source: Bloomberg
The P/E ratio may be slightly high from a historical perspective at 14.5x, but even this is much cheaper than global averages and there is reason to expect earnings to recover strongly over the coming years given how much returns on equity have collapsed over recent months. In order for the EWS to outperform bonds, however, we would not need to see earnings grow at all. Even if earnings continued to stagnate we would expect high payout ratios, particularly in financials, to remain intact, allowing dividend payments to far exceed bond coupon payments.
MSCI Singapore Financials Vs MSCI World Financials, P/B Ratio
Source: Bloomberg
The Financials index, which represents around 40% of the entire index, yields an impressive 5.4%, with a payout ratio of just over 50%. With banking sector leverage ratios around half of the global average and a stellar sovereign balance sheet, the reward far outweighs the risk in our view.
