Investing in Singapore

“The city of Singapore was not built up gradually, the way most cities are, by a natural deposit of commerce on the banks of some river or at a traditional confluence of trade routes. It was simply invented one morning early in the nineteenth century by a man looking at a map. ‘Here,’ he said to himself, ‘is where we must have a city.’”

— J.G. Farrell, The Singapore Grip

Farrell’s tale is about Singapore in 1939. It takes place in the last days before Japanese occupation. The novel captures the early hustle and bustle of Singapore, its sights and smells. He writes, “of incense, of warm skin, of meat cooking in coconut oil, of honey and frangipani, and hair-oil and lust and sandalwood and heaven knows what, a perfume like the breath of life itself.”

The man who looked at a map, as Farrell says in his passage, was Sir Thomas Raffles, the founder of the city of Singapore. Raffles’ vision was to add another trading post in the growing British Empire. It became much more than that. I think it’s safe to say it’s become more than Raffles could have ever imagined.

Today, it’s becoming another Switzerland. As the Western governments look to crack down on tax havens, the money moves elsewhere. In the early days of the 21st century, the preferred haven is Singapore.

The story of Singapore is a story of how a place grows rich in the 21st century. One way, Singapore’s way, is to master the arts of international trade. Be friendly to wealth and it will beat a path to your door. For investors, too, there is a surprising opportunity in the Straits of Malacca…

As with most places, Singapore owes its success, at least partially, to accidents of history. Singapore has a natural deep port, which always helps. But prosperity usually needs a little extra nudging to get out of bed in the morning.

The discovery of tin in nearby Malaya in 1848 was one such nudge. It helped make Singapore an important port for the tin trade. The opening of the Suez Canal in 1869 was another. It cut traveling time between Asia and Europe dramatically. As steamships replaced clipper ships, so the world shrank a little further. Singapore also became one of the world’s largest coaling stations.

As a cog in the British Empire, Singapore was indispensable. As Gretchen Liu writes in her history of the city, Singapore was, “an important link in a chain that stretched from Gibraltar, through Malta, Suez, Aden, India and Ceylon, and to Hong Kong and Australia.”

Singapore soon became the world’s largest supplier of rubber, helped by Ford’s assembly line in 1913, which kicked off a boom in rubber. By 1919, half of the world’s rubber went through its ports. (An interesting aside… You live by the sword; you die by the sword, as the saying goes. During the Great Depression, rubber prices fell from 34 cents in 1929 to a low of about five cents by 1932. A lot of rubber producers met a bitter end.) Even in the 1950s, rubber and tin were still important exports, along with coconut oil, palm oil, tinned pineapple, sago flour, rattan and spices.

So you see, the main business of Singapore has always been trade. It’s also always been a place made up of a variety of peoples from a variety of cultures. Chinese, Indians, Malays and Europeans all flocked to Singapore. Immigrant labor laid down the electric cables, tapped the rubber trees and built the roads, among other things. In the process, Singapore became a unique mix of East and West. Singapore became a hinge upon which the two worlds turn.

Trade and Invest… No Questions Asked

Joe Studwell’s new book, Asian Godfathers, looks at the successes of various entrepreneurs in Southeast Asia. Singapore figures in the larger story. Studwell’s comments shed light on the causes of Singapore’s successes. Many of those causes still serve it well today.

Singapore’s success is due in part to, as Studwell says: “tariff-free trade (with few or no questions asked about what is being traded) and…places to park money (with few or no questions asked about where the money came from).”

In this, Singapore performs a “simple economic trick.” Be a little kinder to money than your neighbors and you will attract the money flow. Though Singapore has a long history of trading and smuggling, its reputation as an Asian Switzerland — as a place to store capital and a financial services hub — is a more recent development.

As the European Union brings pressure on Switzerland to block tax evasion, Singapore has taken up that slack. The number of foreign private banks in Singapore has more than doubled, from 20 in 2000, to 42 currently.

Barron’s reports that Singapore is the world’s second largest banking center, behind Switzerland. Singapore’s worldwide share of the private banking business is around 6 percent, compared with Switzerland’s 18 percent. But Singapore is growing 30 percent per year. Private banking assets are up sixfold from 1998. Today, Singapore is home to about $300 billion, according to Citigroup (which gets one-third of its private banking business from Asia; the folks at Citigroup should know).

All that money needs “handlers” — accountants, investment advisers and other specialists. It’s why the private banking business is so excited about being in Singapore. As an investor, it’s a little harder to invest in this theme specifically. I’m not particularly keen on owning a large financial conglomerate because I like its Singapore exposure.

Beyond that, though, there is another layer to Singapore’s 21st century prosperity that I find fascinating. Singapore is also a hub for water companies, a sort of Silicon Valley of water. Tom Rooney, whom I interviewed for last month’s letter, called it “the most enlightened place in the world on water.” There are over 100 water treatment stocks there, with a total market cap in excess of $50 billion, according to Jim Rogers, author of A Bull in China.

In my newsletter, Mayer’s Special Situations, we’ve owned a Singapore water company since summer 2006. We’re up about 60 percent on it as I write, yet I think we’ve got a long way to go.

The old trading post dreamed up by Raffles continues to be a hotbed of international trade. The Port of Singapore, after all, is the world’s largest. But it’s also become a private banking boomtown and a hub of the growing water sector. Western countries could learn a thing or two about how to get rich by studying Singapore’s playbook. And investors ought to take a look at putting money to work in Singapore.

Raffles, I think, would be pleased.

Sincerely,
Chris Mayer
April 9, 2008