What is happening to the STI Index?

From time to time I would read articles and watch video clips talking about how overheated the US markets are.

In the above video, Phil Town is basically advocating that we increase our war-chest (specifically putting in a Money Market fund), wait at the sideline and to invest when the markets crash. To be patient. Investing at the lows will make up for the time waiting.

For someone who doesn’t really track the STI Index, I might be mistaken that the Singapore stock market is also overheated.

A while ago, I was trying out the Index charts in Yahoo Finance.

I started with the Hang Seng and iShare MSCI China ETF. I wasn’t surprised by the plunge in recent years for both Hang Seng and iShare MSCI China (given the US-China Trade War, Hong Kong Protest & Recession, Novel Coronavirus outbreak, etc).

FYI, iShares MSCI China A ETF seeks to track the investment results of an index composed of domestic Chinese equities that trade on the Shanghai or Shenzhen Stock Exchange.

Then I added in the Dow Jones and S&P500. The divergence (between the China/Hong Kong markets vs the US markets) in recent years is glaring.

What is even more surprising is when I added in STI Index. Looking at the charts, I was wondering what happened to the Index / Singapore stocks…? It was way off both sets of charts.

SPDR Straits Times Index ETF (ES3.SI) was at $3.22 in Nov / Dec 2010, it is now around that price in Feb 2020. Almost a lost decade (of going no-where).

It used to be simpler, years back. When the indices are more or less correlated. Now I don’t know. No doubt when US sneeze, the whole world would feel catch a cold.

China can have a Coronavirus outbreak, with Chinese cities being locked down, and the US markets are still running up all times high.

So is the Singapore Stock Market (STI) expensive or cheap right now?

The long-term average PE ratio: The STI’s average PE ratio from 1973 to 2010 was 16.9. On 13 Feb 2020, the PE ratio of SPDR Straits Times Index ETF (ES3) is 11.95., and it is way off the historical average PE.

It is cheap, viewing it from this angle.

What about the Hong Kong Stock Market (Hang Seng)?

Hong Kong SAR (China)’s Hang Seng P/E ratio on 13 Feb 2020 is 10.84, below the historical average of 12.5 times but slightly higher than the 10.5 times following the global financial crisis. The ratio reached an all-time high of 24.481 in Oct 2007 and a record low of 6.519 in Oct 2008.

It is cheap, viewing it from this angle.

In terms of valuation, as of mid-Feb 2020, the Straits Times Index is going at around 12 times its historical earnings while the S&P 500 trades at a price-to-earnings (PE) ratio (eg.  25.43) that is more than double that of the Singapore stock market benchmark. HSI is selling at a PE ratio of around 11.

Actually, the only thing stopping me from going heavily into stocks is the overheated US markets or shall I say a market crash or recession in the US.

So what will I do in the meantime?

I’ll carry on positioning my Singapore and Hong Kong stock portfolio for income. Looking to buy fundamentally strong dividend-paying stocks on dips, buying small amounts each month.

Nevertheless, I won’t increase my stock proportion much going forward (keeping it around 30% stocks and 70% war chest), trying to keep it as it is.