Why Are The Returns For The Singapore Market Lower Than Our Neighbours?

I recently come across a data set published by The Edge Malaysia. Do you know that the Jakarta Composite Index has gained 20% since the beginning of the year to the close of last Friday? More impressively, the Stock Exchange of Thailand has rallied 23.21% year to date.

What about our very own Straits Times Index (SGX: ^STI) then? The number you are looking for is positive 3.94%. Only the Kuala Lumpur Composite Index had a worse result, bringing in a negative 1.4% return year to date.

The 5 year trend for the performance of the indices also show an interesting fact. The STI has gained about 24.6% before dividends for the past 5 years. In comparison, the Stock Exchange of Thailand Index has gained 120.5% for the past five years excluding dividends while the Jakarta Stock Exchange Composite Index recorded a 107.9% gain excluding dividends for the same period. Even our closest neighbour, the Kuala Lumpur Composite Index has a return more than double ours, 54% gain for the past 5 years excluding dividends.

Singapore has the lowest dividend rates among these four indices. What is going on here? Why does the Singapore market have returns that are significantly lower than its peers?

I once attended a talk that a Head of research of a major brokerage firm in Thailand gave. He basically tried to breakdown the market returns into three main segments.

1)     Earnings growth

2)     Multiple growth or Expectation growth

3)     Dividend and share buyback

Interestingly, he concluded that among all the Asean indices, almost everyone (except Singapore) has achieved such high growth over the last few years mainly from investors’ growth in expectations of them. In other words, most of the returns are coming from multiple growth in the share price to earnings ratio or other metrices.

I am not sure how he obtained his data, or if his data is even accurate. However, his data did raise a fascinating point. If the returns are coming mainly from expectations, what can happen in the next few years?

Foolish Takeaway

From my deduction, it seems that there might be 4 likely scenarios and how the STI would be affected.

1)     The companies in the “hot” Asean indices meet expectations from the investors and the multiples go back to its normal range with STI continue lagging peers in term of absolute returns.

2)     The companies in the “hot” Asean indices did not meet expectations from the investors and the multiples go back to its normal range, most likely with falling share prices with STI unaffected.

3)     Expectations of the STI moved up to match its neighbours’

4)     Every economy falls short of expectations with falling share prices across indices.

This is a short example of a scenario analysis, allowing us to understand what might happen to our investment so that we would not be taken off guard if our investment does not pan out the way we expect it to. Learn more about  stock news and investing through a free subscription to Take Stock SingaporeSign up here to The Motley Fool’s weekly investing newsletter that will teach you how to grow your wealth in the years ahead.

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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 contributor Stanley Lim does not own any company mentioned above