Diversification is an important strategy to spread your investment risks without affecting your potential returns. While there are many ways to go about achieving this, we will look at how we can add stocks from countries outside Singapore to limit our portfolio’s exposure to headwinds in the local Singapore market.
Firstly, if we chose to only invest in companies that operate in Singapore, we could still achieve some form of diversification by ensuring we invest in different companies. By doing this, we would be able to limit the potential negative impacts of any single company in our portfolio. No matter how strong or stable a company is, we could still end up being blind-sided by poor management, unreliable suppliers or credit risk of its customers not paying up.
Investors focusing on Singapore should also invest in companies across various sectors of the local market. This is to mitigate against poor performance, of any one sector. Such situations could arise out of government policies, macroeconomic pressures or just a downcycle in the particular sector.
Next, a natural progression from that is to invest in companies beyond Singapore’s shores. This will further shore up our portfolios by ensuring that even if Singapore’s economy experience a slowdown, our portfolio will still be able to deliver stable returns because other economies in the world are still in the pink of health.
This is the reason we need to understand the importance of diversifying our investments outside of Singapore.
How To Diversify Investments Overseas
While it is true that globalization has increased the correlation of how international economies and its respective stock markets perform, investing in overseas businesses still makes sense as Singapore is an open trade-dependent economy that relies on dynamic global trade to prosper.
Other countries, with large enough populations to support domestic businesses or with natural resources can thrive even if the broader global economy is subdued.
Because of Singapore’s relatively small size, many local businesses have had to expand overseas for growth. In fact, more than half of Singaporean companies now have an overseas footprint, with larger local companies reporting close to 40% share of their revenue coming from their foreign operations.
Leveraging On SGX For Your Overseas Diversification
SGX has done a great job of attracting foreign companies to list in Singapore. They offer viable options for local investors to get started on their overseas diversification journey. Of course, in more recent times, the exchange has lagged peers in doing this, however, this is for another article.
Singapore’s government has also done a good job of encouraging local companies to seek new pastures overseas even as they hone their core expertise locally. Many local companies, big and small, have adopted this strategy and now offer a good option for investors to diversify from the Singapore market.
Singapore Businesses Have Successfully Expanded Outside The Country
This bring us to the fact that some of these local businesses which have successfully expanded overseas are also listed on the Singapore Exchange (SGX). This provides an excellent starting point for investors to take on global exposure by continuing to invest in pretty much the same way.
Singtel is one example. In 2016, the group derived just 29% of its revenue from Singapore. Its Australian business made up close to 24% and its regional associates contributed the bulk of the remaining 47% of revenue.
Similarly, DBS Holdings, Singapore’s and South East Asia’s largest bank, has an established presence in six markets including Hong Kong, China, Taiwan, Indonesia and India. In 2015, its Singapore operations contributed just 62% of its nearly $1.5 billion income, while Hong Kong made up the second largest market with 21% and the rest of the markets contributed the remaining 17%.
Looking it at more broadly, the benchmark Straits Times Index (STI), comprising 30 of Singapore’s strongest stocks, including Singtel and DBS, earned about 50% of its revenues from outside Singapore. This makes it a good place for investors to start their diversification into overseas investments.
Another favourite for Singaporean investors is the REITs segment. Many REITs listed in Singapore also derive a large percentage of their revenues from overseas. This includes many with managing properties worth over $1 billion such as Ascendas REIT, Ascendas Hospitality Trust, Ascott Residence Trust, MapleTree Logistics Trust and more.
A good number of our small cap local companies also have strong overseas presence and market penetration. QAF Limited, a leading food company with exposure to Australia, Malaysia, Philippines and China, derives over 82% of its revenue from its overseas markets.
Q&M Dental, an established local dental healthcare provider, has 30% of its revenue derived from China and Malaysia. MM2, a content producer and distributer as well as a cinema operator, recognised 27% of its revenue from countries outside Singapore, namely, China, Taiwan, Malaysia, Hong Kong.
Further, some small- to mid-sized local companies, listed on SGX, with strong core expertise locally have used the greater market awareness and funds they gained to try to export their business overseas.
They do this for the same reason as individual investors – they want to diversify their income from overseas and ride on it for the next phase of the company’s growth. Some example of these companies include LHN Limited, which was recently talked about in parliament for its drive to expand into China, has fruitfully expanded its business into Indonesia and Myanmar.
ISOTeam is another local company with close to 20 years of experience in Singapore’s building maintenance and estate upgrading industry. They too have ventured in Myanmar and have blueprints already in place for their expansion into Malaysia and Indonesia.
Many Overseas Companies Are Listed On SGX
Besides local companies with foreign businesses contributing revenue, Singapore’s open market also attracts many foreign companies to list here. Local investors can dip their feet in overseas stock investment in a comfortable setting of doing it via SGX.
Global outfits such as commodity firms Olam, Noble and Wilmar and others including Global Logistics, Genting and many more are well-known companies that derive the bulk of their revenue from outside Singapore.
Singapore is also closely connected to ASEAN, and there are some very pertinent companies from our neighbours that are listed on SGX. These include Indonesia’s chocolatier, Delfi Limited, Malaysia’s Top Glove, the world’s biggest producer of gloves which has a secondary listed here, Thailand’s Thai Beverage, a leading food and & beverage brand in the region, Philippines’ Del Monte, another leading food & beverage brand, and Myanmar’s Yoma Strategic, which is geared to prosper from the emerging economies recent opening of its economy.
China is also another region that local investors should pay attention to. Many top Chinese companies have listed on SGX in the past, and none more prominent that Yangzijiang Shipbuilding, China’s largest shipbuilder. Other prominent companies include Hutchinson Port Holdings Trust, SIIC Environment Holdings and Biosensors International.
Overseas REITs have also listed in Singapore, on the back of strong demand from local property lovers. These primarily obtain all their revenue from its home countries and include Japan-focused retail REIT, Croesus Retail Trust, Indonesia-based mall operator, Lippo malls Indonesia Retail Trust, Hong Kong’s retail and commercial property owner Fortune REIT, Indian healthcare property owner Religare Health Trust as well as US office property REIT, Manulife REIT and Germany’s IREIT Global.
Also Read: How REITs In Singapore Performed In 2016
Ensuring Stable Investment Returns
Always remember that you are investing in overseas businesses to earn a more stable return rather than just speculating. You have to follow the same principles and do proper research on the companies you are investing in. Just because its business is in China or Myanmar does not mean it should fly under your radar.
Another area of concern should be that companies that are exposed to overseas market may carry greater foreign exchange, political and credit risks. This may impact its share price and profitability, especially if you are looking to earn stable dividends from it.
Companies that derive a chunk of their revenues from overseas also offer more stable or volatile businesses depending on where the company operates in. Companies operating in matured markets tend to be slightly more stable than companies that are operating in emerging economies.