Besides the recent hype where Nvidia has more than doubled in share price, overseas assets are sporting higher returns and dividend yield as compared to our local companies.
Why is this so? Singapore has a low Risk Free Rate
A reason behind this special observation is due to the difference in risk free rate.
Singapore has a risk-free rate (SORA) of 3.7%. USA's risk free rate (SOFR) is 5.25%. SORA and SOFR are the terminology for the secured overnight fund rates in respective countries. For investors investing in any country, the returns they demand would definitely be higher than the risk free rate. However, across countries, for the same type of asset class, the extra % over the risk freer rate will be the same.
For example an investor investing in a premium grade office building, he would want say a 1% return above the country’s risk free rate. In Singapore, this means he has 4.7% annual expected returns; while investing in USA, he will demand 6.25% annual expected returns.
Do We See This in Real Life?
HK has one of the best REIT I have seen - "LINK REIT". It owns an array of properties including Jurong Point and AMK hub in Singapore. It is the largest REIT by market cap in Asia at SGD 14 billion, larger than any Singapore REIT. Compared to any Singapore REIT, Link REIT has a lower leverage ratio at 21%. However, LINK REIT trades at an 8.3% dividend yield; on the other hand, Capland Integrated Trust, trades at a 4.6% dividend yield at a market cap of SGD13.2 billion. At 8.3% yield, it has a higher yield than most of the REITs in Singapore (Singapore 4%-8%).
Besides the risk profile, where people are adverse to China and Hong Kong (HK) due to the poor sentiments created by the communist government; HK and Singapore has a risk free rate difference, where HK is higher by about 1.25%.
This applies in many other areas of investment such as bank stocks, telecoms, retail REIT etc. Even in USA business listed in SGX, Utdhampshire REIT a grade A diversified retail REIT, albeit with a higher-than-average leverage ratio, trades at 10%.
Can Ordinary Investors Capitalize on this?
Yes, both traditional and new tech brokers (such as Webull/Moo) offer the ability for us in Singapore to invest in overseas assets. All we have to do is either sign up to invest in overseas market of Hong Kong Exchange or if we are lucky invest in SGX listed companies with overseas business. After which, we can just convert our Sing Dollar to the relevant foreign currency.
In terms of the commission for changing currencies, the new tech brokers have a slightly lower rate than our traditional brokerages.
Exchange Rate Risk
No doubt there is exchange rate risk if the Sing Dollar depreciates or appreciates. This is something we must tolerate when investing overseas.
To summarize, it is better to invest overseas. This is patly due to the lower risk-free rate in Singapore. As investors and living in Singapore which allows the ease of moving money, investing overseas is easy. For starters, investors can consider LINK REIT mentioned above, in my view, it is better than any Singapore REIT. Due to the risk-free rate in Hong Kong, has dividends higher than any SG REIT including OUE Commercial REIT.
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