iShares MSCI Singapore Capped ETF: Lion City Roaring Into 2023 (NYSEARCA:EWS)

The iShares MSCI Singapore Capped ETF (NYSEARCA:EWS) has performed poorly in recent years relative to global benchmarks, despite the local stock market and the local currency being global outperformers. This has been due to the weakness seen in the tech sector, which now appears to be bottoming out, allowing the EWS exchange-traded fund (“ETF”) to outperform in recent months. This outperformance is set to continue, supported by the ongoing rise in the Singapore dollar.

The EWS ETF

The EWS ETF holds a concentrated portfolio of large and midcap Singaporean equities, which covers approximately 85% of the total market capitalization in Singapore. Selected securities are weighted by market-cap and are constrained at each quarterly rebalance, such that no individual stock exceeds 25% weight and the aggregate weight of securities with over 5% allocation is capped at 50% weight of the portfolio. Financial stocks have a hefty weighting in the index, at 48%, while Real Estate makes up another 18%. While the dividend yield on the ETF is currently just 2.4%, the forward yield on the underlying index is 4.4%, suggesting the EWS’s yield should rise. The fund’s expense ratio of 0.5% is relatively high, but on par with other country-specific ETFs.

The poor relatively poor performance of the EWS over recent years contrasts with the strong performance of the local benchmark, the Singapore Straits Times Index. After tracking each other very closely for more than a decade, the two indices decoupled in late-2021, since when the EWS has underperformed by over 20%.

This underperformance largely reflects the performance of loss-making technology companies Sea (SE) and Grab Holdings (GRAB), which are listed in the U.S. These two stocks, which are local startups, were trading in bubble territory in late-2021, which gave them high weightings in the EWS. Their combined market cap has since fallen by over 80%, and their weightings in the ETF are now at just 5% and 3%, respectively. Going forward, the EWS should once again track the Straits Times Index, and may even outperform as these two stocks bottom out.

Valuations Are Attractive

Despite these two stocks making negative earnings, the valuations on the EWS are still in line with the MSCI Emerging Markets index, and significantly cheaper than the MSCI World. The underlying index trades with a forward P/E ratio of 12.7x, which compares with 12.4x for the MSCI EM and 15.9x for the MSCI World. The forward dividend yield is also higher at 4.4% versus 3.0% for the MSCI EM and 2.2% for the MSCI World.

Financials Are A Source Of Stability

The financial sector has been on a great run over the past few years, outperforming the index and even outperforming the rest of the world. While financial stocks tend to be added volatility to most countries’ stock indices, Singapore’s financial stocks have lower volatility than the overall market. The country’s main banks DBS, OCBC, and UOB, have a huge 44% weighting in the MSCI, and despite strong gains over recent years, still offer dividend yields in excess of 4%. Their history of rising dividend payments and the financial stability of the city state makes this particularly attractive, especially when considering the long-term appreciatory trend of the Singapore dollar.

Singapore Dollar A Long-Term Tailwind

The relatively mediocre performance of the EWS over recent years contrasts with the strong performance of the Singapore dollar, which has outperformed globally thanks to the central bank’s monetary policy stance. The Monetary Authority of Singapore manages its monetary policy via its exchange rate and has steered gradual appreciation relative to its trading basket. Over the long term, the Singapore government’s commitment to fiscal prudence, economic freedom, and a limited welfare state, is highly likely to see the currency continue to appreciate, benefitting the EWS.

Summary

The iShares MSCI Singapore Capped ETF has underperformed global benchmarks in recent years as two tech startups bubbles burst in late 2021, weighing heavily on the index. This has offset the strong performance seen in the financial sector, which makes up roughly half of the index by weighting. Valuations are attractive, particularly for local banks, which actually add stability to the index due to the country’s high degree of financial stability. This, together with the long-term appreciatory path of the currency, should allow the iShares MSCI Singapore Capped ETF to outperform over the coming years.