Looking Abroad for Investment Bargins

By: Roger_Conrad

It's a six-year bear market and counting for the US dollar versus the world's other major currencies. And with the exception of some select sectors such as utilities and real estate investment trusts, US stocks have lagged most of the world's equity markets as well. That's despite a big recovery by the S&P 500 blue chip index in the past couple of years.

From a US investor's perspective, the best antidote for the underperformance has been to hold some foreign-based shares. Foreign stocks are valued in other currencies, so their US dollar value has risen with the buck's decline.

The effect is multiplied when a foreign stock pays a sizeable distribution, as is the case with global utilities and Canadian

income trusts. In addition to their share prices, the US dollar value of their distributions also rises when the buck drops.

So far this year, the Canadian dollar has appreciated about 5 percent versus the greenback. That's increased the US dollar value of all Canadian trust share prices by an automatic 5 percent, in addition to whatever other appreciation they've attained on their own. And it also translated into an across-the-board 5 percent dividend increase.

The Canadian dollar's solid gains are in large part because of the natural resource bull market that began in the late 1990s. Resources aren't the only business for our neighbor to the north, but they are the straw that stirs the drink. And since bottoming in the late '90s, their prices have been steadily wending their way higher--and pulling the Canadian dollar and Canadian trusts up with them.

The higher resource prices go, the more resource-dependent economies like the US must spend to get them. That means trading ever more US dollars for Canadian dollars and a higher Canadian dollar exchange rate.

Currency markets are often likened to aircraft carriers. Once they get going in one direction, it takes a long time to turn them around. As a result, when a particular currency heads into decline against another, it can be many years before the economics move into place to turn things around. That means it's going to pay to hold foreign-based utilities for a long time to come. Canada's far from being the only beneficiary of the protracted weakness in the US dollar, which shows every sign of lasting as long as the '70s greenback slide--though with plenty of ups and downs along the way. One of my favorite countries for the past few years has been Singapore, the Anglo/Chinese city state often referred to as the “soft landing” for western travelers in Asia.

Singapore isn't rich in resources like Canada. But it has used its historic stability and central location to position itself to be a financial leader for Southeast Asia, which is likely to be the world's premier growth engine for at least the early part of this century.

I had the opportunity to visit Singapore a few years ago and was immediately impressed by its cleanliness, efficiency and tranquility. At that time, the country was surrounded by a sea of economic instability, as much larger neighbors like Thailand and Indonesia wrestled with the threat of economic meltdown stemming from too rapid growth and high debt. In contrast, Singapore largely maintained its stability and has since gone on to bigger and better things. The UF Portfolio currently holds the country's blue chip utility.

The company--which is still partly owned by the Singaporean government--no longer holds a monopoly on the city state's communications services but is more profitable than ever there, with a mushrooming data and wireless business.

Moreover, it's grown to become a leading player in Australia and throughout southern Asia. The most-exciting growth area for the company is India, where it's derived the majority of its recent growth.

Despite a big gain over the past year, the company is still a solid bargain and arguably underpriced relative to its powerful growth prospects in Asia. And unlike utilities and telecoms elsewhere in the region, the company has a long history of operating as a corporation in a jurisdiction that's never wavered in its commitment to free enterprise.

And I like what I see elsewhere in the country as well. In short, an investment in Singapore will appreciate as the city state and region grow and very likely from gains against the US dollar as well. This week, I've called upon my colleague Yiannis G. Mostrous--editor of the weekly The Silk Road Investor ( http://www.silkroadinvestor.com ) --to share his views on this unique country. Like me, he's a fan of the above-detailed company, which he also holds in his model Portfolio. Below, he shares his view on several other recommendations domiciled there: “Singapore is being transformed into one of Asia's most important financial centers as well as a desirable place to live and work. This is a rejuvenation process that should take Singapore once again to the next level of economic development.

“On the economic side, a property recovery started last year, which will be extremely beneficial to the local economy. Singapore has declared that investors putting SGD5 million (USD3 million) or more into the country's financial instruments can become permanent residents, and up to SGD2 million (USD1.2 million) of that amount can be used to buy property. The decision illustrates Singapore's efforts to increase its appeal as a desirable destination for entertainment and high living standards, thus attracting the affluent from across Asia who want a personal getaway.

That particularly includes the Japanese, who are enjoying an economic surge in their own country. “The property story (an investment theme I identified in my premium service at http://www.silkroadinvestor.com in September 2006) is getting better by the day. Singapore has been on the receiving end of strong foreign direct investment (FDI) dollars, which at USD12.6 billion in the first half of 2006 is almost twice as much as the FDI that came in the mid-'90s and early 2000. The government has initiated several projects that will result in more than SGD15 billion (USD9.8 billion) in investment in the tourism sector during the next five years. “A lot of this money is finding its way to real estate--residences, hotels, malls and offices. The high-end residential area is particularly hot with foreign investors, as they currently account for some 60 percent of demand. “This comes as no surprise; in fact, this part of the market should do well in the future, too, as Singapore implements its program for attracting foreign talent to its growing money management industry.

This is the main reason prime office rents are rising rapidly in Singapore.

“The amount of investment money under management in Singapore has been growing steadily. It's expected to grow dramatically in the future as Singapore continues to project itself as a viable and responsible alternative to other banking centers. The interesting statistic, though, is that funds sourced from the Middle East and South Asia grew 30 percent and 56 percent, respectively, year over year.

“Because the government is repositioning Singapore as a “global city” where one can live, work or just have a good time, a lot of rich people are being persuaded by their money managers to buy luxury property in the country. As a result, new luxury buildings are popping up, and the price per square foot has surpassed, in some cases, USD2,000.

“In an effort to enhance the country's appeal to foreigners, Singapore has also awarded a big casino development project, the Marina Bay Integrated Resort, to Las Vegas Sands Corp. The resort will be ready to open in 2009. The structure will feature three 50-story hotel towers bridged by a two-acre Sky Garden that will offer 360-degree views of the city and the sea. The resort will also include an arts and sciences museum; 1 million square feet of integrated waterside promenade and a shopping arcade; a state-of-the-art, 1 million-square-foot convention center; two 2,000-seat theaters; a casino; and a 4,000-car garage.

“Local observers expect Singapore's population to reach 6 to 7 million by 2015, from 4.4 million now. That would imply a yearly growth rate of 3 percent, a solid growth number and one that the county's infrastructure can easily handle. Needless to say, demand for housing and new office space will be huge. “Finally, Singapore remains one of the relatively defensive markets in Asia, especially in its telecom and bank sectors. The market boasts one of the highest dividend yields in the region at 3.6 percent. “KEPPEL CORP stands to benefit from these developments in Singapore as well as the big residential/commercial boom in the rest of Asia.

“Keppel is a multinational company. Through its marine business, the company is a world leader in rig building and has thus benefited from the global energy bull market; its order book is full until 2009.

“Keppel also owns 53 percent of Keppel Land, a big player in the mid- to upper-tier residential property segment and a key supplier of prime office space in Singapore. Through its property subsidiary, Keppel has ventured successfully elsewhere in Asia, namely in China, India, Vietnam, Indonesia and Thailand.

“CITY DEVELOPMENTS is a more-leveraged play on the theme. City Developments will also benefit from growth in non-prime districts, where 20 percent of its land holdings lie.

“UNITED OVERSEAS BANK, a play in the positive changes taking place in Singapore, is also a beneficiary.

“UOB has been steadily improving operations and asset quality while expanding overseas (e.g., into Thailand and Indonesia), which is very good for growth. The bank has achieved a healthy mix of non-interest and interest-based income, with non-interest income growing strongly--always a good thing. During the past year the non-performing loan ratio (NPL) dropped from 8.5 percent to 5.6 percent.

“UOB is expected to continue its share buyback program. Out of the ongoing S$600 million (US$370 million) program, it's completed a little more than S$72 million (US$44 million). Add to this a dividend yield of 3.7 percent and investors are basically getting paid to wait while management continues to improve operations and expand the business.”

RATE WATCH

Will interest rates break out again as they've done every year since 2003? We've seen several feints in that direction this year, with the benchmark 10-year Treasury note yield actually hitting as high as 4.9 percent in late January. So far, every move higher in 2007 has been stymied by the expectation that the Federal Reserve has finished raising interest rates for the cycle and that the next move is down. That could well be the case, as inflation remains at least relatively well behaved and the central bank is deeply concerned the slowdown in US real estate will set off a full-fledged recession.

Action in the markets this week, however, shows just how vulnerable most income investments are to even a subtle change in that outlook.

The Dow Utility Average, for example, experienced a violent 5 point-plus down day earlier in the week, followed by a full recovery the next day. The five-day chart of the 10-year Treasury-note yield shows wild fluctuations between 4.6 and 4.7 percent, with an upside bias.

In my opinion, the US is still living in roughly the same economic environment we've been in since late 2002. That's basically modest growth, with upside capped by rising commodity prices (particularly oil) and downside capped by an accommodative Federal Reserve.

Inflation has ironically also been kept under control by energy prices' cap on growth.

There's little in the data to suggest that anything has really changed this year. The subprime mortgage woes have added to weakness in the US housing market, as lending standards have at least temporarily tightened. But there's little sign of the wholesale collapse in property values some have predicted. And the cooling of the formerly red-hot real estate market has been offset by better results in other areas. As a result, if we do see a rate spike in the coming weeks, it should prove just as fleeting as in prior years. Growth-crazed investors may bid up the S&P and ignore income investments. In fact, that appears to be what's happening now in the marketplace as the blue chip averages make new highs for the first time since the early 2000 peak.

Ultimately, however, the bidding will run its course and interest on the income side will rebound. In the meantime, I'll be looking to take advantage when prices fall to scoop up bargains.

By Roger Conrad
KCI Communications

Copyright © 2007 Roger Conrad
Roger Conrad is regularly featured on television, radio and at investment seminars. He has been the editor of Utiliy Forecaster for 15 years and is also the editor of Canadian Edge and Utility & Income . In addition, he's associate editor of Personal Finance , where his regular beat is the Income Report. Uniquely qualified to provide advice on income-producing equity securities, he founded the newsletter, Utility Forecaster in 1989. Since then, it's become the nation's leading advisory on electric, natural gas, telecommunications, water and foreign utility stocks, bonds and preferred stocks.

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