A Simple Guide for Where Singapore’s Stock Market Is Headed Next

Forming some expectations on what stocks might do in the future can be an important exercise in determining if the odds of success are in your favour.

To do that for Singapore’s stock market, we can turn to the valuation of the market barometer, the Straits Times Index (SGX: ^STI).

Data from the index tracker, the SPDR STI ETF (SGX: ES3), shows that the Straits Times Index had a price-to-earnings (PE) ratio of around 13.5 when it closed at 3,354 points last Friday. This would thus give the index an “earnings” figure of around 248 (3,354 divided by 13.5).

With the earnings figure, we can now see where the index will be 10 years later given various assumptions about its earnings growth and valuation multiple. Here’s a table showing all that (click for larger image):

Straits Times Index valuation table

Source: SPDR STI ETF data; author’s calculation

Both dividends and inflation are not part of my calculations, though it’s reasonable to assume that both forces will more or less result in a wash given time.

Over the 37-year period between 1973 and 2010, the Straits Times Index has had an average PE ratio of 16.9. I don’t have access to historical databases which can provide me a reliable figure for the index’s earnings growth, but judging from the index’s 5.4% compounded annual return since the start of 1988, it’s likely safe to assume that the index’s earnings had historically grown at an average annual rate of between 5% and 6%.

If we then base our forecast for the index’s future on its long-term average valuation multiple and historical earnings growth rate, we’d end up within the boundaries of the red bubble.

But, before you take those figures as gospel, do note that I had given a wide range of outcomes in the table on purpose. The valuation multiple that the Straits Times Index might have in 10 years is the most important driver for where it might be headed next, but it’s not something we can know ahead of time. My colleague Morgan Housel writes:

“Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?”

While the average valuation multiple for the Straits Times Index might be 16.9, there’s a huge dispersion around the average; to that point, the index was selling for just six times its earnings at the start of 2009.

In addition, while the earnings figure could reasonably be estimated, it’s worth noting that earnings growth, much like valuations, can also exhibit wild swings.

Given all these unknowns, it’s only apt to have a table showing many different outcomes like the one you see above. But despite its limitations, the table’s probably still the most honest and simple guide you can get for the future of Singapore’s stock market.

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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.