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Investment for Expats in Singapore

Submitted: April 2014

Singapore is a world-class financial centre, with modern financial markets. Accordingly, the investment climate is quite good and leveraged investments (e.g. through CFDs) are available from Singapore stockbrokers. The only issue in Singapore is primarily about the yields you can get on SGD-denominated investments.

As in any country, expats should be concerned with beating inflation and taxes to preserve the value of their savings. The good news is that Singaporean residents generally do not pay tax on their investments, unless they carry on a trade or derive income from real property in Singapore. The core concern is therefore about beating inflation.

Inflation is a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned by Singapore’s inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside Singapore but you invest in any Singapore dollar assets, you are effectively taking a currency bet.

Political background for savers

Singapore is often viewed by foreigners as a low-tax, low-spend country, without much redistribution. This may be true to some extent, but be wary of all hidden State interventions, i.e. anything where the State intervenes without directly taxing and spending.

One example of this is financial repression through negative real interest rates. In Singapore, interest rates tend to be below inflation – perhaps worse than what you would see in many countries. Accordingly, savers are effectively put into contribution. The beneficiaries of such a policy are all borrowers, especially the Government and Singaporean businesses.

Market interest rates depend on the currency to which they relate. Such interest rates are regulated by the monetary policy of the central bank issuing the currency in question. As a result, expats may therefore have to make a choice between keeping their investments in Singaporean dollars or in foreign currency.  However, exchange rate fluctuations depend on many macroeconomic factors, and not just real interest rate differentials. Further to this, recent experience shows that Singapore’s real interest rates tend to be comparable to those seen in the UK or the US, based on the 10-year Government debt yields.

If you decide to boycott the Singapore dollar, you will financially be a purely international investor. There is no need to park your foreign currency investments outside Singapore, unless you think you will get a better yield by doing so.

Inflation in Singapore - overview

Inflation in Singapore is to some extent subject to central bank monitoring. In practice, the Monetary Authority of Singapore likes keeping inflation low, but its monetary policy is primarily focused on the exchange rate. Accordingly, inflation may be allowed to rise higher if this is necessary to defend the exchange rate.

Putting a figure on how Singapore’s inflation is going to be in the next decade is quite tricky because the MAS will endeavour to defend the SGD exchange rate. Since the 2008 crash, inflation has been quite volatile – rising to above 8% while sometimes dipping close to zero. Broadly, inflation has been between 3 and 4% throughout this period.

For more information on monetary policy, see Foreign Exchange for Expats in Singapore.

Savings accounts

As far as savings accounts are concerned, interest rates are close to nil, and they have been so since the 2008 crash. An easy-access savings account would get you 0.10% (gross) while a 1-year term deposit would land you with a return of 0.25%.

Interest rates on such Singapore dollar investments have never really been above inflation, except perhaps before the 2008 downturn. Consequently, the only way to avoid purchasing power erosion is either to invest in riskier assets, or to park your money in a foreign currency.

CPF accounts

Singapore’s social security system requires you to make contributions towards Central Provident Fund (CPF) accounts. Such contributions are supposed to be made as you earn money throughout your career.
CPF accounts are money that you are supposed to set aside for a specific purpose, such as home buying, medical expenses, old-age pensions, etc. CPF accounts include notably:

  • The Ordinary Account (OA)
  • The Special Account (SA)
  • The Medisave Account (MA)

The Ordinary Account should get you a 2.5% interest rate whereas the remaining two attract a 4% yield. All of these yields are Government-guaranteed, and they are the easiest way to beat inflation in Singapore.

Singapore securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade Singapore securities. Singapore is not necessarily an expensive country in that respect.

Here are the main costs you should be aware of:

  • Broker’s commission fees
  • Minimum commission fees (these can be as low as SGD 2.5 per trade)
  • Any other applicable fees that may be charged by your broker or your bank.

Feel free to shop around and compare the commission structure. Some brokers may charge you below 0.1% while others will charge you 0.5% per trade. Online trading platforms tend to be the cheapest option when it comes to share dealing.

Singapore securities (overview)

The main stock index in Singapore is the Straits Times Index (STI). It has roughly trebled over the past 20 years, which means share prices have risen about twice the pace of inflation throughout that period. That doesn’t mean share prices are overvalued though, as interest rates have almost halved throughout this period as well.

Dividend yields are currently between 3 and 5% for high-dividend shares. As far as fixed-income securities are concerned, a 10-year Government bond would get you a risk-free return of 2.4%.

Be wary of volatility when you invest in securities. Volatility is also highly dependent on fundamentals, especially the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rate variations or expectations. As interest rates in Singapore are already at record lows, any uptick would likely weigh on securities prices.

You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

Offshore investing

If you are resident in Singapore, the taxman will not look forward to taxing you on your foreign-source investment income.
If you wish to invest in overseas or foreign currency assets, there are a few points you need to check:

  • Foreign currency exposure
  • Financial transactions taxes
  • Foreign inheritance tax considerations
  • Asset liquidity
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another)
  • Foreign withholding or income taxes
  • Yields available on foreign investments
  • Your residence status for income tax purposes, and
  • Any foreign financial restrictions or barriers (including fees for international money transfers).

Carry Trade

Carry trade is an investment strategy which consists in borrowing in a low interest rate currency in order to invest in a high interest currency. Carry trade has become fairly common in the Asia-Pacific region the past 20 years. In a carry trade strategy, Singapore would be a country wherein money is borrowed.

There are times international investors are eager to borrow low-yield currencies like the Singapore dollar, convert them into, say Australian dollars or South African Rands, and purchase investments in these high-yield currencies. The point is, doing so exposes to foreign exchange risks.

Carry trade hasn’t been fashionable over the past two to three years, as such strategies are typically pursued when everybody invests into the emerging markets, not when foreign investors pull back their funds from there.

Another reason for today’s lack of interest in carry trade is that most other developed countries, such as the UK, the Euro-zone or the US, are anyway close to Singapore’s. In the future, carry trade is likely to be a matter of dichotomy between developed and developing countries, subject to a few exceptions (e.g. Norway or Australia).

Carry trade is much more complex that it seems, but it may have some financial relevance for many expats in Singapore, especially high net worth individuals. Here is a non-exhaustive list of its core issues:

  • Because of the leverage, carry trade is a high risk/high reward investment
  • Carry trade strategies involve both borrowing and investing, and on a cross-border basis. There are fees for this, but having a long-standing relationship with a Singapore-based banker will surely help.
  • You are to make FX losses if the Singapore dollar appreciates, which is likely if Singapore’s inflation is lower. It should be noted that the Monetary Authority of Singapore (MAS) tries to keep a stable SGD exchange rate versus an undisclosed basket of currencies
/p>There are various reasons why a foreign central bank would set its interest rates high, but high inflation in the country in question is probably the main reason – so check the real interest rate in that country and compare it with Singapore’s

 

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