Factor Investing in Singapore

Exploring the factor exposure of stocks in the Lion City

August 2020. Reading Time: 15 Minutes. Author: Nicolas Rabener.

This research note was a collaboration with Singapore Exchange (SGX). We appreciate the joint effort and their support.

SUMMARY

• Singapore’s stock market has unique features given its strong sector biases
• However, despite these, there were no structural factor exposures over time
• Like in other markets, investors can pursue factor investing to generate outperformance

INTRODUCTION

One of the stories of how Singapore received its name is about a Sumatran prince who came across a mythical beast called Janggi while hunting. Janggi acts as a guardian of gold mines and supposedly has lion-like features. From there to the name Singapore it is straight-forward: Singa is derived from the Sanskrit word for lion and Pura means city, given birth to Singapura, or the “Lion City”.

The story is as mythical as the beast as there are no lions in South East Asia, only tigers, and Singapore is not known for gold mines. In fact, the city-state has so few natural resources that even water needs to be imported from nearby Malaysia.

Historically an abundance of natural resources was perceived as a blessing, however, economists’ thinking has changed as it became clear that most countries rich in oil and minerals squander their wealth away. Nations with few natural riches had to work with the only resource at their hands: their people, and in the case of Singapore, also its favorable geographical position for trading.

The composition of Singapore’s stock market reflects an industrious and trading-oriented country as it is dominated by financial, industrial, and real estate companies. These three sectors contribute more than 75% of the stocks of the FTSE Straits Times Index (STI), the benchmark index.

It is surprising that the real estate sector plays an outsized role in such a small country, but these are mostly companies that are listed in Singapore and manage assets elsewhere, highlighting a sophisticated financial market that is attractive for global companies seeking capital.

However, corporates that have revenues from diverse geographies and relatively small local footprints are complex animals. Analyzing stocks in the Singapore market is therefore frequently challenging. It is ques