EWS: Singapore Yields Up To 7% But Remains Relatively Unattractive

Southeast Asian stocks have, perhaps rightly, been repriced lower following a series of ‘sticky’ inflation reports out of the US and globally. The rationale being that this not only raises the risk of delayed rate cuts by the Fed but, by virtue of the Fed-dependent reaction functions of Asian central banks, also reprices regional risk-free rates higher. The net result, as evidenced by the performance of Southeast Asian equities recently, is pressure on equity valuations. Singapore is perhaps the regional exception, given its outsized exposure to a banking sector that should see profits benefit from a higher rate tailwind.

The issue, however, is Singapore’s non-bank equities, where increasingly challenged earnings outlooks threaten to drive downward revisions ahead. The all-important property sector, currently under pressure from high interest rates and a ramp-up in ‘cooling’ (or anti-speculation) measures by the government, is a case in point. Meanwhile. the Singaporean consumer continues to struggle with rising domestic costs; even after a recent pickup in tourism, retail sales volumes remain notably below 2017 highs.

Thus, while the prospect of ‘higher for longer’ rates has led to relative outperformance by iShares MSCI Singapore ETF (NYSEARCA:EWS), in line with my prior coverage (see EWS: Fundamental Headwinds To Outweigh The Attractive 5% Yield), I don’t see a compelling case to own the fund. Valuation-wise, stocks still aren’t that cheap either at the current ~11x earnings, especially when benchmarked against consensus earnings growth expectations (~7% in 2024 and ~6% in 2025), which remain at the bottom end of the region. EWS’ high-single-digit % dividend yield certainly helps, along with a relatively stable exchange rate; on balance, though, these positives aren’t quite enough to outweigh the negatives, in my view.

EWS Overview – A Fundamentally Sound Singapore ETF

The iShares MSCI Singapore ETF remains the only US-listed, pure-play Singapore investment vehicle. Given this scarcity, EWS’ intact 0.5% expense ratio, despite seeing its net assets decline further to ~$425m, screens attractively. The ETF also retains good liquidity, with average 30-day volumes up to ~624k, in turn, keeping its median bid/ask spread at a fairly narrow ~5bps. EWS’ remaining fundamentals remain consistent with prior quarters; as it continues to track the MSCI Singapore 25/50 Index, EWS is still very much a Singaporean mega-cap fund.

EWS Portfolio – More Bank-Heavy than Before

Having narrowed to 22 holdings this quarter, it is perhaps no surprise that EWS is even more concentrated than before in Financials (up to 49.9%). The second-largest sector exposure remains Industrials (17.7%), though this is more of a catch-all classification – note that different businesses like conglomerates, airlines, and consumer/tech fall within this category. Thus, the other key EWS sector exposure is really Real Estate, which has been downsized to 13.5% following a challenging few months.

Communication (up to 10.5%) and Consumer Staples (down to 3.0%) round up the fund’s top five sectors, which, at a cumulative ~95% of the portfolio, means EWS’ fortunes are closely tied to a handful of sectors. The good news, particularly for investors who don’t mind the fund’s banking concentration, is that EWS is even more defensive than before, with its equity beta down to 0.6 (vs the S&P 500 (SPY)).

The single-stock allocation, in line with the fund’s sector concentration, is led by all three of Singapore’s big banks – DBS Group (OTCPK:DBSDF) at a higher 20.9%, along with Oversea-Chinese Banking Corporation (OTCPK:OVCHY) and United Overseas Bank (OTCPK:UOVEY) at a broadly unchanged at 14.4% and 11.3%, respectively. Notable changes outside the banking portfolio include an increased allocation to e-commerce/digital entertainment company Sea Ltd (SE) at 6.1%, while CapitaLand Ascendas REIT (OTCPK:ACDSF) has dropped out of the top five following a challenging period for Singapore real estate. As EWS continues to lean heavily toward its top holdings (currently an outsized ~57% of the portfolio), investors should remain mindful of the concentration risks.

EWS Performance – Great Dividend but Mind the Limited Capital Return

Bank-heavy EWS has been a lot more resilient than its Southeast Asian peers in the face of ‘higher for longer’ rates – both in terms of underlying earnings and currency stability. iShares’ Indonesian (EIDO) and Thai (THD) equivalents, by contrast, are now down high-single-digits % to date after a surprise defensive rate hike by a central bank in the region.

Yet, even after accounting for its yield, EWS has delivered negligible total returns over the last decade at an annualized +0.6%. One key reason is Singapore’s relative maturity, which caps the earnings growth potential of its listed companies. Of note, Singapore large-caps are only expected to grow earnings at a mid to high-single-digit % pace over the next year or two – well below less developed Southeast Asian markets like Thailand (low-teens %), Indonesia (high-single-digit %) and Malaysia (low-teens %). The other key issue is the price, which, at ~11x P/E and a ~40% premium to book, doesn’t fully reflect this lower growth reality.

Instead, Singapore, like its other low-growth counterpart in the Asia-ex-Japan universe, Australia, is valued more for its income. Given that on a trailing twelve-month basis, EWS currently offers the highest yield in the region at a well-covered 6.6%, this seems fair. The question, though, is whether this yield can be sustained once interest rates eventually normalize. Guidance numbers from the big banks and the fact that EWS’ 30-day yield stands at a much lower (but still very solid) ~4% indicates it probably can’t; thus, I wouldn’t pin my hopes on anything upwards of a low to mid-single-digit % yield in the mid to long-term.

Singapore Now Yields Up to 7% but Remains Relatively Unattractive

Amid renewed volatility for Southeast Asian stocks, Singapore has once again proven its defensiveness; its largest and most liquid US-listed tracker, EWS, has even gained slightly year-to-date. Now if we do see more inflationary pressures and a ‘higher for longer’ rate regime, EWS should continue to do well, helped by its high banking sector concentration. That said, any earnings (and dividend) upside will be capped by growing headwinds across the rest of the portfolio, especially property. The ~11x earnings multiple also seems rich for a group of stocks with among the weakest growth runways in Asia. Net-net, I remain sidelined at these levels.