Having spent three years there as a child, I have happy memories of Singapore.

In those days, most of the locals lived in “atap” palm-frond-roofed huts and bathed by standpipes.

Today’s Singapore is completely unrecognizable to me.

It is a modern country that is now among the world’s richest. There is barely a palm-frond roof to be found anywhere.

Singapore is also ranked first on the World Bank’s Doing Business list (the U.S. is fourth), second on the Heritage Foundation’s Index of Economic Freedom (the U.S. is 10th ) and fifth on Transparency International’s Corruption Perceptions Index (the United States is 24th).

So why is the Singapore stock market trading on an 8.3 times P/E ratio, according to the Financial Times?

The Upside of the Singapore Stock Market

After all, its economy is in fine shape, and is growing faster than any of the major Western economies.

[ad#Google Adsense 336×280-IA]In fact, with its GDP per capita estimated at $50,700, Singapore is now richer than the United States.

It’s all proof that as the world’s leading trade entrepot, Singapore is aggressively moving up the global value chain as its citizens become richer and better educated.

And unlike the U.S., Singapore’s recovery from the 2008-09 recession was rapid, with 14% growth in 2010.

Since then, it has entered a mini-recession, with GDP declining at a 2.5% annual rate in the fourth quarter of 2011.

Still, overall growth in 2011 was a solid 4.8%, and the country is expected to grow by another 3.1% in 2012, according to the analysts at The Economist.

Inflation is a moderate problem, running around 5%, although it is expected to decline.

Yet the most impressive statistic about Singaporeis its current account surplus of 18.4% of GDP; the budget is also in modest surplus, as it is most years.

With a GDP of only $266 billion in 2011, Singapore is a relatively small economy. But its exalted position in wealth, economic freedom and clean government and business make it a country that is a highly attractive place to invest in.

That’s why its current modest P/E ratio is so surprising.

The recession has affected bank earnings (Singapore is a center of private banking, with excellent secrecy laws) but its industrial companies appear to be doing well, so patient investors should find themselves very well rewarded indeed, as the market enjoys an upward re-rating.

Investing In the Singapore Exchange (SGX)

Since Singapore itself is one of the world’s major stock exchanges, its companies do not have full listings on the U.S. exchanges. To date, compliance with the Sarbanes-Oxley legislation has deterred them from doing so.

For investors that means the most efficient way to invest in Singapore is the iShares Trust MSCI Singapore index (NYSE: EWS), which has net assets of $1.5 billion and an expense ratio of only 0.55%.

With a P/E ratio of 13, somewhat above the market as a whole but still reasonable, and a yield of 3.8%, this Singapore-based ETF is an attractive way into the market.

For the more adventurous, I recommend the Pink Sheets ADRs of Keppel Corporation (KPELY.PK). Each ADR represents two shares of Keppel common. Its P/E ratio is 10.8 times and the yield is around 2.2%.

Keppel is the only company I can think of named after a British Admiral of the Fleet, Sir Henry Keppel (1809-1904). It is a name I fondly remember from my Singapore childhood.

As Commodore in the 1840s, Keppel was posted to the Singapore station, where he defeated the Borneo pirates and discovered Singapore’s magnificent deep-water harbor, which was renamed in his honor when he revisited Singapore in 1903, as a 93-year old Admiral of the Fleet.

Keppel Corporation began as the shipyard for Keppel Harbor and later diversified into real estate and oil drilling rigs. It is currently re-developing Keppel Harbor with luxury apartments.

Keppel now has operations in over 30 countries in offshore drilling equipment, environmental engineering, real estate development and logistics.

In 2011, Keppel’s revenues grew by 10% and earnings per share jumped by 13%. Meanwhile, its offshore rig division captured $10 billion in new orders, more than double the previous year’s level.

As a growth proposition, Keppel is a particularly attractive.

Fifty years later, Singapore is much more than a place of great memories. Today its stock market is the biggest bargain in the world.

— Martin Hutchinson

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Source: Money Morning