With the recent market volatility in the local stock market and sharp declines in markets in North Asia, one cannot be blamed for thinking that markets have headed nowhere in the last few years.
If we take the Straits Times Index (SGX ^STI) as a barometer for how well companies have been doing, then there seems to have been no noticeable progress in the last two to three years.
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The STI stood at 2,882.73 at end-2015. As at 30 November 2018, the level of the STI was 3,117.61. The index had only risen 8.1% in almost three years, and a simple average would yield a return of around just 2.6% per year. Arguably, this is even lower than the long-term inflation rate of around 3% per year for Singapore, so should investors be worried? The short answer is no. For a longer answer, please read on.
The Index Is Not Fully Representative Of The Entire Market Of Stocks
Using the index as a measurement of whether companies have grown or not is not always the best method, as the STI is primarily composed of banks, real estate companies and telecommunication companies. This means that an investor who relies solely on the level of the index may be misled into thinking that growth was poor or sub-optimal, and that companies in general cannot grow profits and cash flows above the level of inflation.
Companies Are Still Growing
It’s important to remember that there are many companies which are still growing, even if their share prices may not reflect this. Investors should focus their attention on the business fundamentals and assess if a company has managed to grow its market share, revenue, profits, cash flows and dividends in a meaningful way. If so, then this is evidence of a company which is doing well and may indicate that investors should purchase more of its shares.
Dividends And More Dividends
Even if companies may not have grown profits significantly since 2015, some of them are still paying regular and consistent dividends, and these should be factored into overall returns as well. Investors who own shares in dividend-paying companies are paid a decent yield to wait for catalysts to play out, or for the economy to gradually improve.
Keep Calm And Continue Investing
The important takeaway here is for investors to stay calm, focus on what’s key to investing and to continue to look for opportunities to deploy capital. By worrying too much on the level of the market, investors may be focusing too much on the forest (i.e. the market) and miss out on the trees (i.e. individual companies).
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.