Is Singapore’s Stock Market Healthy?

Over the past 14 months since the start of 2013, the Straits Times Index (SGX: ^STI) here in Singapore has actually moved 2.4% lower to 3,090 points even as other foreign markets – like in the USA and Japan for instance – have seen their major market indices put on strong gains.

So, we can at least say that the stock prices of Singapore’s blue chips aren’t exactly in the strongest of health. But, is that reflective of the corporate performance of the 30 companies within the index?

As of today, 17 out of the 30 companies within the Straits Times Index have reported their quarterly earnings. Of those 17, 10 had announced their full-year results for 2013 while the others are for various quarters of their financial years that do not happen to coincide with the calendar year.

For those companies that had released their full-year earnings, there was a mixture of good and bad results. For instance, United Overseas Bank (SGX: U11) achieved record profits of S$3.01 billion in 2013, up 7.3% from S$2.8 billion in 2012. On the other hand, we have property, marine, and infrastructure outfit Keppel Corporation (SGX: BN4), which saw its profits drop 17.5% year-on-year to S$1.845 billion during the year.

All told, exactly one year ago on 19 Feb 2013, the 30 companies within the Straits Times Index had earned S$36.16 billion in collective profits over the past 12 months then. Fast forward to today, and we have the index components earning S$34.0 billion in total, some 6% lower.

In this context, the Straits Times Index’s 2.4% dip certainly doesn’t seem too unwarranted and is perhaps indicative of the blue chips’ corporate performance, which isn’t exactly in the pink of health either.

But, that shouldn’t scare anyone off from investing for the long-term. As my colleague David Kuo once wrote, “rather than focus on one year’s underperformance, we should remember that stock market investing is a marathon, not a sprint.”

Billionaire investor Warren Buffett once wisely quipped that “only in the sales presentations of investment banks do earnings move forever upward.” It’s only in fantasy-land where we can expect corporate profits to be forever moving up. Reality isn’t so neat and businesses as a whole are bound to hit some temporary hiccups here and there, which is normal.

Besides, very bad economic conditions and corporate results can still result in stupendous investment gains if valuations are right.

That’s what happened to Greece from June 2012 to Oct 2013 when its major market barometer, the ASE Index, climbed by almost 150% (one of the best performing markets in the world for that period of time) despite a horribly-shrinking gross domestic product in the country. The reason for that was because the index was trading at an absurdly low cyclically-adjusted PE (CAPE) ratio of 2 back then (i.e. the pessimism attached to Greek shares in the form of really low prices were too extreme despite economic conditions that weren’t ideal).

So, look beyond a year or two of declining corporate profits and flat stock market prices here and think about the important issues. Does paying 13 times earnings for the Straits Times Index – as referenced from data provided by the SPDR Straits Times Index ETF (SGX: ES3), an exchange-traded fund that tracks the index – look expensive to you? What about the long-term future and economic prosperity of Singapore? Do you believe in that?

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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.