This is like Shenzen in 1979

Shenzen is a ludicrous place. Today it’s Blade Runner-eqsue concrete canyons and neon signs. Fifteen years ago, when Hong Kong re-joined China, it was a busy, dirty manufacturing centre. And in 1979 it was a dirt-poor fishing town of less than half a million people.

Shenzen is now home to over ten million people. It seems to me to have sprung up as quickly as a film set. And Shenzen is a satellite city. That means it got rich by its location, right across the border from booming Hong Kong. The tiny islands of Hong Kong needed cheaper land and labour, and Shenzen provided it. Which brings us neatly to the tiny island nation of Singapore…

Singapore’s economy is too big for its island

Last week Singapore experienced its first labour strike since 1986. 177 Chinese bus workers staged a wildcat strike – and today, one worker has been sentenced to six weeks in prison for it. The Chinese workers were unhappy after they only received a S$75 monthly pay increase (increasing the monthly salary to S$1,075), whereas Malaysians received a S$150 pay rise (lifting their pay to S$1,775). The bus company SMRT explained that the real difference is insignificant as the Chinese were given dormitory lodging, while the Malaysians had to pay for their own accommodation.

Although this conflict will be settled, it says something about Singapore. The World Economic Forum ranks Singapore as the second most competitive economy in the world. But the country has problems: labour relations issues; high inflation; wide income inequality; and tough rules on foreign workers. All this means that Singapore will have to outsource more and more of its economy.

I predict neighbouring countries will benefit, particularly Malaysia’s southern tip – Johor State. In today’s New World I’ll tell you exactly how you can benefit from Singapore’s tipping point.

Singapore is trading below its 2007 peak

Originally one of the three British settlements in Malaya (together with Malacca and Penang), Singapore has thrived on trade and commerce. In the early 1970s, Singapore adopted an export-led manufacturing growth formula for economic development. It was a spectacular success and it made Singapore one of the wealthiest countries in the world.

Singapore has become an international business centre. This means good infrastructure, access to a good education system and a stable judiciary.

Following the Asian crisis in 1998 and China’s accession to the World Trade Organisation (WTO) in December 2001, Singapore began to target better-run companies. The Singapore government focused on EVA (‘economic value added’). This measured a company’s financial performance based on residual wealth by deducting cost of capital from its operating profit.

Over the last decade the FT Singapore Straits Index has risen 130%. Impressive. But the index is trading at 20% below its peak in October 2007 – it’s been a frustrating five years for investors.

Singapore is congested, and the people don’t like it

In May 2011 the ruling People’s Action Party (PAP) had its poorest result since its independence in 1965 in terms of successful opposition candidates and the PAP’s share of the overall vote.

The people are unhappy about inflation, income inequality and foreign workers. The island of 5.2 million people relies heavily on immigrant workers, particularly in the hospitality, transport and construction sectors. This influx has caused a backlash, with accusations that foreign workers are ‘stealing’ jobs and pushing up housing costs.

In January 2013, the parliament will decide how open Singapore will be to foreigners. It looks likely that stricter immigration rules are on the way. But there will also be costs to Singapore, in lower potential growth and higher inflation.

In my view Singapore will have to outsource parts of its manufacturing and service economy.  China is not as cheap as it once was – so I think Singapore is more likely to outsource to neighbouring countries.

How to buy this theme

I think the simplest way to buy this theme is through a company called UEM Land. As the largest listed Malaysian property company, UEM Land owns a huge land bank adjacent to Singapore.

Singapore needs to develop a satellite city to thrive, just like Shenzen to Hong Kong. I think UEM’s land value will sky-rocket. Because I’ve seen this happen myself. I’ve watched the relationship between Malaysia and Singapore develop in the years I’ve lived there. Land prices have been rising in Iskandar for the last ten years.

Take a look at this chart showing the population growth in Shenzen. It demonstrates that if you’d bought in ten or twenty years ago you’d have been part of a pretty incredible growth story.

City of Shenzen population

Chart - population of Shenzen, China

Chart:
Wikipedia

The two countries are diplomatically closer than ever… and commercial relationships are following on from that.

On 23 October Ascendas Land International Pte Ltd, a Singapore government-linked company, set up a 60:40 joint venture with UEM Land to develop an integrated eco-friendly tech park in Nusajaya. This is an area that the Malaysian government has been heavily promoting and is one of the five flagship zones in Iskandar, Malaysia.

With an investment value of $1.2bn, the 519-acre freehold tech park will be the closest industrial site to the Malaysia-Singapore Second Link checkpoint and is directly accessible by a comprehensive network of main roads and highways to major international airports and seaports.

The development is expected to take place in three phases over nine years, with the launch of the first phase targeted in the last quarter of 2013. When fully completed, it is expected to host a business community of over 34,000 people.

Another example comes from Peter Lim, named the eighth richest man in Singapore by Forbes, who plans to build an RM3bn ($1bn) race circuit in Iskandar, with the Johor royal family and Malaysia state asset manager Khazanah Nasional Berhad.

The circuit is set at a 100-hectare site, located 10-15 minutes away from Tuas’ Second Link Bridge to Singapore. And it is planned to offer a track certified by FIA, the world motor-racing body, and host go-kart, GT and motorcycle races.

All told, 2013 looks like a tipping point for Singapore. And if correct, I think that investors who track the Singapore money flow will be handsomely rewarded…

This article is taken from The New World, MoneyWeek’s FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

  • John T

    Excellent article, Singapore is great to visit but may be difficult to live in, lots of people, not much space. One question – if Singapore id the second most competitive economy in the world what is the first?

  • Massey 240

    When I started reading your article I guessed exactly where it was leading too. I have spent a fair amount of time in Singapore and Kl in recent years and to me Lars you are stating the obvious. I know a lot of Malaysian workers commute to Singapore everyday so what you say makes perfect sense. Also, about a year ago I read that a Singapore bank bought a large Indonesian bank.I believe the highest visitors to Singapore come from Indonesia and also Singapore passport holders can travel freely to Indonesia. Interesting area.

  • Keith (Bangkok)

    Very interesting article. Does UEM Land have any other projects on the go?

  • Gunder

    Great article and spot on! As a KL resident, I just returned from Nusajaya seeking residential land there. Prime area going for USD28SF .. soon more! Thanks.

  • Gordon

    Another excellent article. It would help when recommending a stock to give a little detail, e.g.ticker,exchange, currency, price history and a suggested limit price. This would be in line with other of your publications – RHPS, RHBA, RI, etc. Just a minor, and hopefully constructive, criticism.

  • john

    i had a market share for a hotel build in Shenzhen in 1998 – it was a disaster. All foreign investors got fleeced. It was devastation for some. I did manage to invest in china later, and now all is good with the loss more than covered. It was scary back then when underhand deals, and corruption was even more rife than now. Ive been watching singapore and getting similar feelings for investment purposes but always felt there had to be solid reasons why it hasnt happened yet. The malay connection will be key for singapore growth success for sure.

  • Tai

    Singapore is the obvious story Malaysia is the real eye opener witness the tremendous growth that has happened there in the past 20 years.Malaysia has moved up and continues to move up the value chain with a strong domestic market.Major Japanese co.s like Matushita , Panasonic invested in manufacturing there over a decade ago Malaysia is also the leading Islamic financial centre I believe the very first Islamic bond was raised here..

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