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Straits Times Index At 3,000 Points? March 3, 2006
With Singapore's positive fundamentals, the STI might even hit 3,000 points by year end.
Author : Wong Sui Jau

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AT 3,000 POINTS?

If you were told that the Straits Times index could rise to 3000 points by the end of this year, what would be your reaction? If the Straits Times index even went past 2,600 points, would you get nervous? The reason for this nervousness is that it has never ever crossed 2,600 points before, so it would signal an all time high. The truth is that many investors often see the index of a stock market in light of its past performances and base their analysis from there. So if the Straits Times index was to cross 2,600 points, that would be considered incredible (for many investors). And 3,000 points? Some would shake their heads at this number and claim it impossible.

But let us look the current level of the Straits Times Index. It closed at 2,480.30 points on Thursday (2 March 2006, see chart 1). What would it require for the index to cross 2,600 points? To achieve that, the index would only need to rise just 4.8% more. Given the potential for markets to rise and fall, a movement of 4.8% or more is certainly very possible for the Straits Times Index. So what about 3,000 point for Straits Times Index? To a fair number of investors, it might seem like a pipe dream. But let’s convert this into percentages first. From its current levels, the Straits Times index needs to rise 20.95% to achieve this. With the rise now expressed in percentages, does this now seem much more achievable? Consider the fact that the Straits Times index rose by 78% in the year 1999. So, a 20.95% rise would not even be anywhere close to what the Straits Times index has previously achieved in terms of a potential return within one year. In fact, from 1986 till now, over a period of 20 years, there have been 7 calendar years where the Straits Times Index rose by more than 23% within one year. Consider also the other Asian markets in the region. Markets like Thailand, India, China and South Korea have all on occasion risen more than 50% within a year. So, for a stock market to rise above 20.95% with more than 10 months still to go, is certainly possible.

More importantly, can the Singapore stock market (as represented by the Straits Times index) achieve this kind of potential? From looking at Singapore’s fundamentals, it is possible.

Firstly, the Singapore economy is growing healthily and this growth is expected to continue. The Ministry of Trade and Industry (MTI) has just announced that Singapore gross domestic product (GDP) for 2005 is 6.4%. This came on the back of very strong 4th quarter GDP growth (12.5%) and this strong growth is expected to extend into this year. MTI now forecasts that the Singapore economy (as represented by its GDP) will grow by 4 to 6% in the year 2006. Many economists and analysts agree that growth is expected to continue as it is more broad based, with most sectors in Singapore all experiencing a healthy increase in the fourth quarter.

More importantly, 110,800 new jobs were created in 2005, and this was the largest number of jobs created since 2000. Unemployment has dropped to just 2.5%. This signals that the economic growth is filtering down to job creation and this tight job market will then directly contribute to rising incomes. This also translates to more spending power and more money for investments as well.

Secondly, the recently-announced budget shows that the government remains intent on keeping Singapore competitive by upgrading and restructuring the economy. While the focus of many will be on the progress package worth S$2.6 billion that the government is giving out, it should be noted that the first part of the budget announced was all about how the government was going to upgrade and restructure the economy. For instance, MTI announced a plan to spend S$7.5 billion over the next 5 years on research and development in the effort to make the Singapore economy a knowledge-based one. The budget also touched on efforts to further develop Singapore’s manufacturing, financial, maritime and logistics sectors with various tax incentives and programs announced. Efforts to support and help local enterprises go regional were also included in the budget. The budget also announced plans to allocate an additional S$2 billion to the university sector over the next 5 years as an effort to further develop Singapore’s human capital. All this signals that barring any unforeseen negative offshore events, Singapore’s economy is unlikely to stagnate and will continue to grow because a huge amount of effort is being made to ensure that it remains relevant and competitive in today’s ever changing global environment.

Thirdly, Singapore is in a region of high growth. Many Asian economies have been growing at a rapid rate, especially China and India. Both of these countries are likely to be very significant, important markets in Asia and the world. The upturn in the electronics sector has also helped to contribute to growth in Singapore as the electronics sector forms a major part of the economy. Global growth is also expected to be favorable as the US economy continues to grow, and Japan’s economy is also now improving. While concerns like high oil prices remain, the overall outlook of the global economy is positive and coupled with the Asian region’s high growth, any economic influences from outside of Singapore are likely to be positive rather than negative.

Fourthly, although Singapore’s interest rates have been rising, they are still relatively low. More importantly, equities still look more attractive when compared to interest rates in terms of their return. This means that Singaporeans are more likely to spend as well as invest their money (since the alternative of saving gives such low returns.) Inflation, which may rein back growth, is also likely to be low with the Singapore government forecasting it to remain at 0.5 to 1.5% for 2006.

Lastly and most importantly, the earnings of Singapore companies making up the Singapore stock market are likely to rise while valuations remain attractive. The earnings growth forecast of the Singapore market for 2006 is 9.9% and 10.9% for 2007 (source: Fundsupermart compilations). With all the factors mentioned above, growth is likely to remain robust and this is likely to continue to drive earnings upwards. Thus, there is a likely possibility of upward revisions in earnings as the year continues. Valuations for the Singapore market, at 14.5X forward PE ratio for the year 2006 and 13.1X forward PE ratio for 2007 (source: Fundsupermart compilations) also remain attractive as Singapore has historically traded in the high teens in terms of PE ratios.

In conclusion, investors looking at an index (like the Straits Times index) may sometimes dampen their expectations due to their historical knowledge of the index’s performance. But as is often said, past performance is no indicator of future returns. Considering Singapore’s many positive fundamentals, there is no reason to believe that a 3,000 points Straits Times Index is impossible. In fact, it might even be achievable by the end of the year, if everything falls into place.

Wong Sui Jau (CFP, General Manager) is part of the Research and Editorial team at Fundsupermart, a division of iFAST Financial Pte Ltd.

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