Singapore stock market August 2016 – some reasons to feel not quite so gloomy!

The Singapore stock market has not given investors much joy of late. As of the end of last month, the benchmark Singapore Straits Time Index (STI) was off 0.5% for the year, had lost 11% over 3 years, and 10% over 5 years. The most recent good year was back in the distant past of 2012 when stocks rose a healthy 20%.

China’s slowing growth and the related collapse in commodity prices have probably been the main contributers to the lacklustre performance. Brexit was another hammer blow, as was the banking scandal related to 1MDB. In addition, deflation has been weighing heavily, with the CPI falling for 17 consecutive months. Any asset is going to struggle under such conditions, and Singapore stocks are no exception.

As the summer doldrums take hold, a lot of investors will be wishing they had sold in May. So, is the Singapore stock market really a lost cause?

In fact, there are perhaps a few reasons to take a more sanguine and nuanced view of the outlook.

First of all, the dividend yield of the STI is currently around 3.5%. This is very close to the historical high of the last 30 years, and well above the historical average of 2.7%. In the past, the market has risen 100% or more in the 17 months following a move above 3% for the yield. While there is an argument that the extraordinary low level of global interest rates is unprecedented, and hence a new paradigm is in place, nevertheless, it is noteworthy.

Second of all, the cyclically adjusted price-earnings (CAPE) ratio suggests that the Singapore stock market is cheap at the moment. The CAPE ratio, which some argue is a more accurate measurement of the value of a market because it takes into account the economic cycle and inflation, was 11x as of end of June 2016. The current non-adjusted PER is around 12x. While there are other countries trading on lower CAPE ratios, most of them have a higher PER, or a lower dividend yield.

Thirdly, Singapore blue chips are trading on a modest 1.1x price to book ratio (PBR). This means that investors are being asked to pay only a very slight premium over the book value for the very best quality shares in Singapore. US technology, by contrast, is trading at 4.4x PBR, which is far from undervalued even on the most optimistic view.

And finally, although trying to estimate the economic growth rate of any country is clearly a mugs’ game (economists will naturally tell you otherwise!) – the historical growth rate of Singapore has been sterling, clocking up an average of just under 6% annualized. Whether the country can return to such high growth levels again is certainly questionable. But even if the rate picks up to only close to that achieved in the past, profits would receive a hefty boost, suggesting share prices would move higher.

Therefore, while you may still be dreaming about lounging at the poolside, or wandering around some beautiful city in the South of France, perhaps you may now be feeling slightly less depressed that you did not offload all your Singapore stocks when you had the chance. Who knows, for those contrarians out there, you may even be considering adding a bit!

(By Celia Kawakami)

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