What’s So Important about the 3,300 Points Level for the Straits Times Index?

On 9 August 2014, the news publication TODAY published an article with the headline “STI falls below key 3,300 level”. Just to be clear, the article – which actually left me scratching my head – was talking about the closing level of the Straits Times Index (SGX: ^STI) last Friday.

I was a little confused about the importance of the “key 3,300 level.” The closest the article came to explaining its significance is found below:

“For the STI, the 3,300-point remains the key level to watch, analysts noted, with some saying the current dip was likely temporary.

“The STI will likely hover around this level for a bit. Geopolitical concerns come and go. They are usually the surprises and unexpected events that create such volatility, but as markets start to price in this development, these concerns usually fade off into the background,” said [CMC Markets analyst Desmond Chua].”

That for me wasn’t any explanation at all because it failed to touch upon what’s the most important thing when it comes to buying shares: Are Singapore’s shares expensive or cheap in relation to the developments of their underlying businesses?

If the 3,300 points level signalled a historically high or low valuation, then it could be an epoch in Singapore’s share market history. After all, buying shares when they’re cheap (expensive) gives investors a high chance of doing well (poorly). That’s why the valuation of the share market as a whole is important.

But that’s hardly the case currently, with the index closing at 3,306 points today.

According to data from the SPDR STI ETF (SGX: ES3), an exchange-traded fund that tracks the STI, Singapore’s share market barometer is currently valued at around 14 times trailing earnings. In the 19 years between 1993 and 2012, the STI’s long-term mean PE had been around 17. That small difference between the index’s current PE and its long-term mean would mean that the index’s valuation now would hardly be anywhere near ‘epoch-making’. To further support my point, investment research outfit Morningstar pegs the long-term projected earnings growth for the SPDR STI ETF at 9.58% as of 31 July 2014; with forward earnings growth of near 10% and a trailing PE of 14, that also hardly constitutes as a valuation that’s anywhere near being out of whack.

A few months back, my colleague Morgan Housel published an article titled “The Only Daily Market Update Worth Paying Attention To”. In it, he wrote the following:

It’s a great reminder by Morgan that arbitrary points levels isn’t what is really important about the market. Instead, the important thing is the progress of the myriad businesses which make up the share market.

In his article, Morgan also wrote that “[most] investors spend too much time tracking stocks and following financial news. But if we’re going to have daily updates, report numbers that actually mean something.” The financial media might never take his suggestion up. But at the very least, you now have a better idea of what’s important when you read financial news.

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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.