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Where Are Singapore Stocks Headed Next?

At its current level of 3,174 points, Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), is up by 10.4% over the last 12 months. Not surprisingly, the index is also within touching distance of a 52-week high of 3,190 points.

Given the steep run-up, investors may be wondering: Where’s the Straits Times Index headed next? To answer that, a good place to start would be the index’s current price-to-earnings (PE) ratio.

It’s hard to find data on the Straits Times Index’s valuation, but a useful and adequate proxy can be found in the PE ratio of the SPDR STI ETF (SGX: ES3). The SPDR STI ETF is an exchange-traded fund that mimics the fundamentals of the Straits Times Index.

Right now, the SPDR STI ETF has a PE ratio of 13.1, which implies an earnings figure of around 242 (3,174 divided by 13.1) for the Straits Times Index. From this, we can take a look at the possible paths the index can take over the next five years. This is shown in the chart below, which does not take into account dividends and inflation (the inspiration for this comes from former Fool Morgan Housel):

Straits Times Index eventual PE ratio and earnings growth
Source: SPDR STI ETF website and author’s calculations

The future return of the Straits Times Index – if we exclude the impact of dividends and inflation – is really governed by just two factors: (1) The change in the earnings of the companies that make up the index; and (2) the valuation multiple that the market decides to award to the index. The chart above allows you to pick from a wide range of outcomes, depending on the index’s eventual earnings growth and PE ratio.

The problem here is that no one can reliably predict the two forces, although history can be used as a rough guide. The long-term average PE multiple for the Straits Times Index from 1973 to 2010 is 16.9. As for the index’s historical earnings growth rate, I don’t have access to any reliable record, but I think a safe assumption would be a figure of between 5% and 6% per year.

We can thus have an informed guess on where the Straits Times Index would be in five years’ time if we use the average PE multiple and earnings growth rate mentioned above. But, it’s also worth noting that the averages are just that – averages.

In reality, the earnings growth rate and the PE multiple – especially the PE multiple – can exhibit wild swings over the short-term. Who’s to say for sure what the PE multiple for the Straits Times Index would look like when we are in April 2022? But whatever it is, you can choose your own adventure from my chart above and check back in again five years later.

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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.