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Why The Singapore Market Is Set To Rise

Would you like the table by the window, sir?” asked the waiter. “Actually, no”, I replied.

Truth is: If God had wanted me to be a goldfish, he would have given me gills, big eyes, a dorsal fin and a tail.

But have you ever noticed how restaurant owners like to seat customers near an outside window, before they fill up the rest of the eatery? It is an old marketing ploy that helps to give the impression that a restaurant is busier than it might actually be.

Safety in numbers

As far as potential walk-in customers looking in from the outside are concerned, a busy restaurant – even if it might only be illusory – must be a good sign. Consequently, any qualms that undecided customers might have had about stepping into the diner could be quickly put aside.

Something similar happens in the stock market. In the main, investors like to think that a busy market must be a good place to buy shares. It is a “safety in numbers” thing. They equate frenetic trading activity with lucrative money-making opportunities.

Unfortunately, investing doesn’t quite work like that. Frenzied activity might appeal to traders but it is not for us serious investors.

In fact, a busy market could be a sign that too many buyers are chasing a limited pool of shares. By contrast, a quiet market could be a better place to look, if you are hunting for bargains.

Positive signs

So am I positive about the Singapore market which, at the moment, appears to be quieter than a Texas salad bar?

Yes I am. And one pointer in particular gives me reason to be positive.

Over the last dozen years, Singapore companies have increased the amount of money that they have distributed to shareholders in dividends.

After the Millennium, Singapore’s biggest companies only paid out about a-sixth of their profits in dividends to shareholders. That is a shockingly-low payout ratio.

But the proportion doubled to around a-third in 2008, before falling back to roughly a-quarter in 2010. The cut-back was understandable. The global financial disaster created unprecedented uncertainty that prompted many companies to hang onto their cash.

Growing confidence

Since 2010, though, the average payout ratio has risen gradually. Last year it was around 40%.

In other words, the 30 companies that make up the Straits Times Index (SGX: ^STI) paid out S$40 in dividends for every S$100 of profit they made. These included taxi operator, ComfortDelGro (SGX: C52), United Overseas Bank (SGX: U11) and defence contractor, Singapore Technologies Engineering (SGX: S63).

The increase in the payout ratio could suggest that Singapore companies are growing in confidence about their future. Evidently they do not believe that their cash-cushion needs to be quite as plump, anymore.

Confidence has been the missing ingredient in the recent global recovery. The lack of business conviction has held back capital investment; it has held back expansion plans and, worst of all, it has held back wage growth.

Gone fishing

But confidence appears to be returning. That could herald better times not only for Singapore businesses but for Singapore consumers, Singapore workers and Singapore investors too.

As investors we should remember that stock markets often take the stairs up and the elevator down. The market might appear to be quiet but as Peter Lynch once noted: “For a stock to do better than expected, the company has to be widely underestimated”.

And as any self-respecting angler knows, if we want to land a big catch we have to go where other fishermen aren’t dipping their rods. Right now anglers are flocking elsewhere. But I am casting my line in the Singapore market, where the waters are noticeably calmer.

A version of this article first appeared in Take Stock Singapore.

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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 Director David Kuo doesn’t own shares in any companies mentioned.