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Where’s Singapore’s Share Market Headed Next?

It’s been almost exactly seven years since the Straits Times Index (SGX: ^STI) closed at its all-time peak of 3,876 points on 10 October 2007. But at its recent level of around 3,250 points, Singapore’s market barometer is still more than 15% lower than where it was back then.

This got me thinking, where’s the STI headed next? To answer that, a good place to start would be the index’s current valuation.

Using data from the SPDR STI ETF (SGX: ^STI), an exchange-traded fund which tracks the STI, I found that Singapore’s market bellwether is valued at slightly less than 14 times trailing earnings. This thus gives the index earnings of around 230 (3,250 divided by 14).

From there, we can have a glimpse at the possible paths the index could take in 10 years’ time. This is shown in the chart below (the idea of creating such a chart comes from my colleague Morgan Housel), which excludes the impact of dividends:

STI levels

Source: SPDR STI ETF website and author’s calculations

The chart allows you to pick from a wide-range of outcomes and that is useful because the future return of the STI (excluding dividends) is governed by factors: (1) the aggregate earnings growth for the companies that make up the index; and (2) the valuation multiple awarded to the index. And as it turns out, no one can reliably predict what these two figures would be a decade from now.

History could of course be used as a guide. In that sense, the long-term average PE multiple for the STI (from 1993 to 2012) has been around 17. I don’t have any reliable records for the historical long-run earnings growth rate for the STI, but given its 5.4% compounded annual growth rate in price since the start of 1988, I think it’s fair to assume that the index’s earnings had grown at somewhere between 5% and 6% per year in the past two-plus decades.

Combining these two figures – a PE multiple of 17 and an earnings growth rate of 6% – could thus make for an informed guess on where the STI might be 10 years later. But, it also pays to note that an average is just that – an average. The reality is that earnings growth rates, and especially the index’s valuation multiple, exhibits wild gyrations from year to year.

Who’s to say for sure what’s going to happen to the price/earnings (PE) multiple for Singapore’s market barometer when we reach October 2024? But whatever the case may be, choose your own adventure from the chart above – and I’d see you in 10 years’ time.

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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.