• Investors who buy Singapore equity funds may think that they have substantial exposure to the local economy
• We look at the STI and the MSCI Singapore indices for a better idea of underlying geographical exposure
• By market value (as of 3 March 2010), 83.5% of the companies are domiciled in Singapore for the STI; For the MSCI Singapore index, this figure is 94.2%
• Country of domicile classification is less relevant, revenues are a better reflection of underlying exposure
• Our estimates show that only 26% of STI company revenues are generated in Singapore
• For the MSCI Singapore, this figure is slightly higher at 31.7%
• This enforces our point that the Singapore market’s earnings are less dependent on domestic economic growth, hence our lower emphasis on domestic GDP forecasts
• Investors should note that smaller companies may tend to have a more domestic focus

Most investors may find it obvious that owning a Singapore equity fund would give them substantial exposure to the Singapore economy. After all, STI bellwethers like Singapore Airlines, Singapore Telecommunications and DBS Bank are household names for most people in Singapore. While a large proportion of the local economy is represented in the stock market through some of the country’s largest companies, whether the Singapore economy has a substantial bearing on these companies is not as obvious. Challenging the notion that the local stock market is largely dependent on the Singapore economy may appear ludicrous to most of our investors, but that is what we are about to do in this article.

Singapore equity funds benchmarked to the STI or MSCI Singapore

The Singapore equity funds we carry are either benchmarked to the Straits Times Index (STI), a familiar index for most retail investors, or to the MSCI Singapore index, an index which many money managers track (see Table 1). While fund managers may deviate substantially from the benchmark holdings, we believe that a study of these two indices will paint a clearer picture of a Singapore equity fund investor’s underlying geographical exposure.  

Country of domicile shows large domestic exposure, but is not an accurate representation

We first looked at where the companies in each index are domiciled – where a company is registered and has its legal address or registered office. Based on this simple measure, we also weighted the country of domicile according to each company’s percentage representation in the stock market index. In the STI, 25 out of the 30 components are domiciled in Singapore, with these companies taking up 83.5% of the index’s market capitalisation. For the MSCI Singapore index, all but three component stocks are domiciled in Singapore, giving domestically domiciled companies a 94.2% representation (percentage allocations based on 3 March 2010).

Based on the “country of domicile” measure, both Singapore market indices are largely dominated by local companies, but this is not (in our opinion) an accurate representation. Underlying exposure is not determined by where the company is domiciled, but rather, where the company does its business. An attribution of profits to different countries for each company would be ideal, but this is complicated by varying situations where country-specific losses occur. As such, we turn to the geographical breakdown of revenue for more clarity.

Geographical segmentation of revenue

We looked at the 34 companies which are found in either the STI or the MSCI Singapore (or in most cases, both) and examined the geographical breakdown of their revenues. Table 2 shows the list of companies, along with domestically-derived revenue as a percentage of overall revenue. Most percentages are either the last reported, five-year historical average, or an estimate where such figures are not available (Percentages in Table 2 intend to portray a more accurate representation of the future revenue streams of each company, and estimates are used where historical figures are less representative).

As seen in Table 2, the 34 companies have varying degrees of exposure to the local economy. Not surprisingly, some companies like the Singapore Exchange and SMRT Corp derive all of their revenue from Singapore while others, like the three local banks, DBS, OCBC and UOB, derive almost two-thirds of their revenue from Singapore, indicating a substantial dependence on the local economy. However, more than half (19 of 34) the companies examined derive less than half of their sales from the local market, a surprisingly large figure. Two companies even had zero sales in Singapore (last reported).

Two-thirds of revenue generated overseas

In the same manner that we compile earnings of index stocks into an earnings-per-share figure, we determined revenue figures for both the STI and MSCI Singapore (based on consensus estimates for revenue between 2009 and 2013). We also determined domestic-derived revenue for the two market indices for comparison.

Our calculations suggest that only 26% of STI revenue is domestically-derived, while Singapore-based revenue makes up 31.7% of the MSCI Singapore’s total revenue. This indicates that two-thirds of the revenue (of Singapore companies represented in the two major market indices) is actually generated overseas. Our calculations may even overestimate the Singapore contribution of revenue, as we have used the full 10% for the six companies (Wilmar International, Noble Group, Olam International, Neptune Orient Lines, Jardine Matheson and Jardine Strategic) where we estimate Singapore-based revenue of less than 10% for each company.

What this means for Singapore equity fund investors

While the various Singapore index bellwethers continue to have substantial influence on the local economy (many of which are market leaders in various products and services), our study shows that many of these corporations have substantial business outside of the country, resulting in foreign-derived revenues making up the bulk of revenues on the whole.

What this suggests is that the companies in which Singapore equity funds invest are in a rather unique position: They are well-positioned to benefit from growth in the local economy, but they are not totally dependent on it. These companies are increasingly seizing growth opportunities outside the country, and are not being limited by constrains like the small population base or the lack of natural resources. We may even wish to view our investments in the Singapore equity market as having a more global outreach, but with the benefits of good corporate governance (through long-standing Singapore-domiciled companies) and lesser political uncertainty.

The results of our study also enforce our point that the Singapore market’s earnings are less dependent on domestic economic growth, hence our lower emphasis on domestic GDP forecasts as mentioned in prior articles (see “Singapore: No worries over 4Q 09 contraction”). Investors who hold Singapore equity funds may thus wish to focus more on more regional economic data, rather than Singapore-specific news in relation to their investments.

[Our investors may wish to note that despite the single-country focus of Singapore equity funds, we have attributed a risk rating of 8-High Risk to most of these funds, reflecting a wider-regional focus of the underlying companies, as well as better reduced currency risk. Most single-country funds have a risk rating of 9-Higher Risk.]

Our study involved the two Singapore equity benchmarks, which consist of larger companies with a more global reach. As at 4 March 2010, there are 767 companies listed on the Singapore Exchange available for investment by fund managers, many of which are much smaller in size than the companies mentioned above. These smaller companies may tend to be more focused on the domestic economy, and the fund manager may hold some of these companies to obtain more direct exposure to the Singapore economy.

related articles:

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