How do you measure value?
I’m not talking about stock valuations, where you can use metrics like the price-to-earnings ratio, book value, or the price-to-earnings growth (PEG) comparison.
I’m talking about honest-to-goodness value for everyday goods and services – a.k.a. purchasing power or “bang for your buck.” Simply put, it’s the amount that you can buy with one unit of money.
It’s no secret that the U.S. dollar’s purchasing power is steadily eroding. One dollar simply doesn’t stretch as far as it once did, in the face of rising prices for crucial, everyday goods like gasoline and food.
For example, if you had $1 of purchasing power in 1950, it would have taken $8.91 in 2009 for that $1 to have the same power, due to rising inflation.[ad#Google Adsense]That’s quite a disparity. And over here in Southeast Asia, where I’m currently on an investment research trip, I just experienced an equally revealing display of purchasing power disparity between two of the region’s emerging market nations…
The Winds of Change Blow Through Singapore
Singapore: Home to the world’s fourth-largest financial center… a plethora of five-star hotels… excellent cuisine… vibrant nightlife… and with the exception of Hong Kong, no other city in the region comes close in terms of per capita wealth.
Oh, and it’s expensive, too. Very expensive. As expensive – if not more so – than most major cities in the United States and Europe.
I was in the city-state last week for meetings with several companies and investment bankers and it’s noticeable how much the place has changed since I was last here a few years ago.
Yes, the city is still very safe and the locals are welcoming and eager to please. But outside of food at the markets or trinkets in Chinatown, there are few bargains these days.
For example, I was charged S$10 for a soft drink at a nice hotel – about US$7.50. Granted, Singapore is a bastion of Asian sophistication, but that doesn’t merit the prices it charges. I haven’t paid that much for the privilege of drinking carbonated, sugared water since I was in Geneva. And this lack of purchasing power has made Singapore a more restrictive destination for the less well heeled.
But a 90-minute plane ride away, the situation couldn’t be more different…
Good Morning, Vietnam
In terms of purchasing power parity, Ho Chi Minh City (Saigon) in Vietnam is a world apart from Singapore.
It boasts the same quality of hotels, cuisine, nightlife, excitement and warmth, yet offers far better value for money. I experienced this first hand. When I travel, I buy certain staples to tide me over during long journeys or waits. In Saigon, my basket cost US$4.92, but I paid more than double in Singapore. And a Swiss Toblerone bar cost 60 cents in Saigon, compared to over $3 in Singapore.
A look at the real estate sector and the automobile industry drives the point home further.
~ Real Estate: Comparing real estate prices in Vietnam and Singapore is like comparing prices in Detroit and Beverly Hills. However, this Detroit might be more fun to live in than Beverly Hills.
Because Singapore is a tiny place (barely 700 square kilometers of land), it’s very densely populated. And with space at a premium, a “nice” place will set you back around $1,000 to $1,500 per square foot. A high-end luxury apartment will cost you upwards of $2,000 – major bubble territory.
Vietnam occupies the other end of the spectrum. A nice apartment in Saigon runs about $300 to $500 per month for rent and close to $100 per square foot to buy. And while Saigon isn’t Singapore, it’s still a comfortable, modern city and compares favorably to many in Asia, as well as the United States and Europe. I can’t emphasize enough that Saigon and Hanoi are not third-world dumps – and believe me, I’ve seen my share over the years.
~ Automobiles: Both Singapore and Vietnam impose big tariffs on cars, which means the overall prices are very expensive – double and even triple the cost of ownership in the United States or Europe. For a new driver, the price of a license to buy and drive the car the cost can be as high as US$40,000.[ad#ChinaBlankCheck]In Vietnam, scooters are most common means of transport. However, cars are making it onto the roads in big numbers. It’s not unusual to see high-end vehicles like BMWs, Mercedes and Lexus, either. I also saw two Bentleys in Hanoi in just one day. However, Vietnam doesn’t have a strong enough road infrastructure to support a massive shift to automobiles, so it’s trying to discourage the use through higher taxes. It’s not working.
Comparing and contrasting the cost of living in terms of purchasing power parity is a good way of measuring relative valuation for the same goods. And when it comes to investing, it can determine whether an economy is a good value or overpriced.
Based on my observations so far, Vietnam is in the “Sale” section, while Singapore is going for full price. And from an investment standpoint, Vietnam is not only undervalued, but underrated, too.
— Karim Rahemtulla[ad#jack p.s.]
Source: Investment U