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Where Is Singapore’s Market Headed for 2014?

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The year that just passed, 2013, could be said to be a lacklustre year for investors in Singapore’s stock market. After all, our benchmark index, the Straits Times Index (SGX: ^STI), ended both 2012 and 2013 at 3,167 points.

This meant that investors in both index trackers, namely the SPDR Straits Times Index ETF (SGX: ES3) as well as the Nikko AM Singapore STI ETF (SGX: G3B), would have gotten very similar capital gains for the whole of last year of basically, nothing. Though, investors in the ETFs ought to realise that they would likely have collected around 2% to 3% worth of gains from dividends that are given out by both funds.

In any case, it’s not hard to imagine how such flat returns would raise a very pertinent and important question among investors: “Where’s the Straits Times Index headed for 2014?”

To answer that, let’s turn to the index’s valuation. Using the SPDR STI ETF’s data as a close proxy, as of 4 Jan 2014, the market’s paying S$12.30 for every dollar of earnings for the index at its current level of 3,131 points.

That does not seem exorbitantly expensive, especially when compared with the historical average of its price-to-earnings ratio, which is around the high teens figure. In addition, the STI is also a fair bit cheaper than other major stock market indexes around the globe.

Index (country) Level Price-to-Earnings Ratio
S&P 500 (USA) 1,831 18.9
FTSE 100 (England) 6,731 16.6
Nikkei 225 (Japan) 16,291 15.3
S&P/ASX 200 (Australia) 5,350 24.2
Straits Times Index (Singapore) 3,131 12.3

Source: S&P Capital IQ; Data for SPDR Straits Times Index ETF

So, if you subscribe to the view that cheap shares generally portend great things to come, then it would seem that the STI’s on some good standing in regard to future returns.

But here’s where I’m going to turn things around. Despite earlier suggesting that looking at valuations can give us some clues on where the STI would be headed to for this year, the actual fact is that it’s really hard to pin down exactly where markets would be in any given year.

Yet, that does not mean that we can’t form a general picture of what long-term gains can look like. Throughout history, buying cheap shares and holding them for the long-term has been shown to have great efficacy in generating satisfying returns; cheap shares however, gives no protection to investors over the short-term.

As such, while “Where’s the Straits Times Index headed for 2014?” can be a pertinent question, it’s also, at the same time, the wrong question to ask. Instead, investors should be looking beyond a flat 2013 and ask, “Where’s the Straits Times Index headed over the next 10 or 20 years?”

Over the past 26 years since the start of 1988, Singapore’s stock market barometer has grown by some 275%, or 5.2% a year, from 834 points to 3,131 today. Tack on dividends, and we are looking at annualised returns in the ballpark of an 8% figure. This correlates well with the SPDR STI ETF’s annualised returns of 8.45% (inclusive of dividends) from 11 Apr 2002 to 30 Nov 2013 (some 11-and-a-half years), which is the latest available period we can find data on.

So, historical returns for the index have been great, but can it be used as a sound basis for judging future returns? That would really depend on your view of Singapore’s long-term economic outlook. Can our country’s economy remain vibrant and strong over the next few decades? That’s the key.

All told, instead of thinking where Singapore’s stock market would be this year, think in terms of where our market can be over the next 10, 20, or even 30 years, using the index’s current valuation as well as Singapore’s future as the bedrock for your analysis.

And on that front, I’ll leave the last word to my Foolish colleague, David Kuo:

So rather than focus on one year’s underperformance [referring to the STI’s flat 2013], we should remember that stock market investing is a marathon, not a sprint. And that the long-term outlook for the Singapore market remains bright.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.