Singapore’s Worst Economic Recession Since Independence – Should We Stop Investing In Singapore Stocks?

The news is official – Singapore is in an economic recession after witnessing two consecutive quarters of GDP contraction. Compared to the same period last year, Singapore’s GDP contracted by 12.6% in the second quarter (Mar-Jun 2020).

Earlier this year, Ministry of Trade & Industry (MTI) projected a GDP contraction ranging from -7% to -4% for the entire 2020. It would be the worst GDP contraction we have ever experienced since independence. We are really on track to achieve that estimate. This means that we should expect more retrenchments and business closures when the government’s financial support begins to wane for the remainder of the year.

If you have been more observant, you could have seen that Singapore GDP growth rate has been declining steadily since 2010. Is there a chronic problem that’s plaguing our economy?

The Singapore’s stock market returns are pretty discouraging too. The blue chip Straits Times Index (STI) has a negative return of 12.47% from 10 years ago. Even Hang Seng Index (HSI) had a better return of 22.34% despite the social unrest in Hong Kong. The biggest winners in this bull run were the U.S. stocks – S&P 500 and NASDAQ gaining 186.42% and 360.85% respectively.

It is hardly easy for any investor to swallow a loss after investing for 10 years. This led to many voices suggesting Singapore blue chips are a gone case and one should invest in U.S. tech stocks. It is not hard to come across comments bashing Singapore stocks on social media:

Even CPF advocate, Loo Cheng Chuan, wrote a full article thrashing STI.

Is this the end of Singapore?

New vs Old economies

The favourite explanation for the underperformance of STI is that the local companies are no longer growing at a fast rate as compared to their younger years. They are not innovative and competitive at the global stage. The situation is totally different in the U.S. whereby Silicon Valley has been spitting out the next generation of companies to rule the world. Even China has her fair share.

Recently, I compared four indices and their exposure to the tech sector. The index performance is highly correlated to the tech sector weight – NASDAQ with half of the index in tech did a lot better than the other indices that had lower tech exposure. STI unfortunately had no tech to drive its returns for the past many years and was the worst performer among the four.

We can go one step deeper to look at the lifecycle of companies. Prof Damodaran has an easy framework to refer to. There are 6 stages in the lifecycle but we can drop Stage 1 and 6 because they aren’t stocks that most investors are looking at. Stage 2 stocks are like Tesla whereby it has crazy growth rates but yet to make a profit. Stage 3 stocks are like Netflix whereby it has high growth rates but has turned profitable. Stage 4 stocks are big tech stocks that generating good profits and are growing faster than the GDP growth rate. Stage 5 stocks are stocks with little to no growth which are bountiful in Singapore. An example is Singtel. SEA and Razer would be considered Stage 2 stocks but they have both chosen to list in US and Hong Kong respectively. Hence, the Singapore stock market continue to harbour matured Stage 4 companies.

The stock market is currently valuing stocks in Stage 2 and 3 handsomely. Stage 4 is doing well but not as crazy as 2 and 3. Stage 5 is being punished the most. With a lack of young high growth companies among Singapore listed companies, it is hence difficult for the local stock market to shine in the current market sentiment.

The logical conclusion is for Singapore to transform our economy and strive towards a smart nation. Sounds familiar? That’s because our government has been drumming this message for years.

Does Singapore need to catch up with innovation?

I would argue that we do not need to create world class tech companies in Singapore. This might be contrary to what most people think. Firstly, we can try but success will be extremely remote. Our successful companies would ended up being acquired by the bigger players. We have a macroeconomic ceiling that limits our companies to be truly global MNCs. Second, we only need to attract the next generation of companies to set up a place in Singapore and tax them.

Two years ago, I wrote about this issue deeply in The Real Singapore Inc. It is still relevant today and I will reproduce a segment here,

Over a coffee conversation with Thomas from my15hourworkweek.com, he mentioned that the true form of Singapore Inc is that of a ‘payment gateway’. We need to have MNCs set up shop on our shores so that we can tax them. The above statistics showed that his words ring true.

In order to attract foreign MNCs, we have to be a hub for everything. The Smart Nation initiative aims to attract the biggest tech companies to set up offices and regional headquarters here. They are future drivers of the global economy. They might also turn out to be the biggest contributors of our tax dollars.

The Government, with its monopoly on talent, has figured things out ahead of us. We are not in a favourable position to create a world beating MNC. The odds of that happening are very low. The next best thing we can do is to attract foreign MNCs so that we can tax them. We have to be prudent with our expenses and invest our large foreign reserves to bolster our financial future. We need to operate as one Singapore Inc.

In the movie Justice League, there was a scene whereby Flash asked Batman, given that the latter is only human, what was his superpower really was. Batman replied, “I’m rich.”

Singapore’s superpower is closely linked to our financial and economic status. We have no resources; we only have money. We cannot lose this power. The only way to preserve this and to ensure our survival is for our government to plan, execute and function as one Singapore Inc.

Hence, Singapore just needs to attract Google, Facebook, Amazon, Apple and the likes to set up shop here. But we need to provide the infrastructure (Smart Nation), talent pool (re-skill workforce if we need to) and political stability, else they won’t come. With their presence, our Small Medium Enterprises (SMEs) can become vendors to these MNCs, earning good profits for our towkays and provide employment to Singaporeans.

Should you stop investing in Singapore stocks?

Yes and no, because it depends on your investment objective and strategy.

If you are a growth investor, look elsewhere. Singapore is not the place for growth stocks. U.S. and China have most of them.

If you are a value or dividend investor, Singapore still has a lot to offer. Especially for the latter because Singapore offers one of the highest dividend yields in the world and we have a long list of REITs to invest into. The best of all is that there’s no dividend tax. Our Early Retirement Masterclass (ERM) trainer, Chris Ng, is a testament of dividend investing – he retired at 39 by living on his dividends. He probably would take more years if he did it in other countries. So there is merit to Singapore stocks and not everyone is seeking the highest returns in growth stocks.

My message to those who are laughing at Singapore stocks is that there’s no benefit for you if Singapore Inc doesn’t do well. You can be a growth investor and invest in the US or anywhere else. It is your money and you have the prerogative to invest it the way you want it. But you do not need to gloat at Singapore Inc’s poor performance thus far. Any detrimental changes to the Singapore economy or the Singapore Dollar can destroy your career and retirement in this tiny island. If you are not relevant or unable to contribute to the new economy, you are part of the problem.