Will the Singapore stock market continue to outperform?
This year, the index has underperformed some markets such as South Korea, China and Hong Kong, but it remains one of the best performers.
Many forget that the STI's outperformance follows a sustained period of underperformance. Many other markets are also at historic highs. The question may not be whether to invest or not. Instead, how much of our portfolio should be invested in our home market?
Why invest in our home market
It is human nature to favour something that is familiar to us. This is known as mere exposure bias. It describes our tendency to develop preferences for or dislike things simply because we are familiar with them. It is also known as familiarity bias.
In the context of financial markets, this is expressed in the form of home or home-country bias, which is the tendency to invest the majority of assets into domestic equities, despite evidence that diversification can produce a more optimal portfolio.
To be sure, there may be other barriers to investing overseas, such as regulations, costs or foreign exchange risks.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
US exceptionalism alive and well
Home bias exists in every market including the US and across Asia. However, the effect differs because some markets are bigger and have broader representation than others. There is only one market that is big enough with globally competitive companies, is diversified across geography, sector and size, and allows for a meaningful and consistent outperformance over time. That is the US stock market.
Whether it is the S&P 500 index or the broader Russell indexes, the US represents more than half of the global stock market capitalisation, and comprises 64 per cent of MSCI All Country World Index (ACWI). The next largest is Japan whose share is less than 5 per cent. This attests to the big gap the US has over every other market in the world, and shows how exceptional and unique the US market is.
It is also why in the past two decades, investment flows into the US as a form of diversification for local non-US investors have risen. The average annual foreign capital inflow into the US stock markets has increased from an average US$50 billion in the 1970s to more than US$500 billion in recent years. This, in turn, has resulted in better returns for these investors.
Home bias investing in Singapore
The benchmark STI is a collection of the 30 largest and most liquid companies listed on the Singapore Exchange, which comprises more than 600 listings. The STI represents a meaningful S$622 billion of market capitalisation.
The Monetary Authority of Singapore recently announced its Equity Market Development Plan to revitalise and broaden the Singapore equity market, especially the mid and small-cap segment outside the STI. It has allocated S$5 billion to co-invest alongside private capital; some initial capital was awarded to Avanda, Fullerton and JP Morgan Asset Management. Separately, Amundi, the largest European asset manager, launched an STI index fund with the lowest cost of 0.15 per cent in Singapore. Both initiatives are happening in time for SG60 celebrations.
As the STI touches new historic highs and interest is resurgent due to new product launches and government support, many investors wonder whether the current rally has more legs.
Historically, the STI has been a perennial underperformer. Over the past 15 years, it has lagged the S&P 500, gaining 2.4 times compared to 8.7 times by the S&P 500. Of course, the real question is whether this trend will continue. Between 2002 and 2012, the STI outperformed the S&P 500 in nine out of 11 years.
When home bias is positive
While no other economy is comparable to the US, some regional players do set themselves apart. India offers growth and diversified sectoral exposures, and Taiwan has tech and entrepreneurial companies which generate high returns on equity through cycles. Those are two examples of economies with good equity culture that have generated better returns. They also exhibit strong home bias.
Another good example of a positive home bias is Australia, with its ageing and wealthy population and its superannuation pension system. Like Australia, Singapore has among the highest GDP per capita, a large savings pool, an ageing population and a high rate of home ownership, as well as the CPF Investment Scheme. Singaporeans have the wherewithal to invest consistently into their local market too.
What sets Singapore apart is that its companies have lowest dependence on the local economy and highest overseas revenue contribution, compared to the other major stock market indexes in Asia and the US. Most of Singapore companies' revenues are generated in South-east Asia; this growing diversification in its revenue source is a positive.
What drives change?
The world is evidently changing. There is continued noise around tariffs; concerns over US economic growth and the US Federal Reserve's interest rate policy abound. However, those are cyclical issues. The underlying current of structural changes points to a new global regime and the end of an US-led post-war international order which could reshape many things, among which is international cross-border investment flows.
Countries which turn inwards may start to keep more of their capital at home. A structural change of this order and magnitude could reshape investor behaviour and patterns which could be positive for the Singapore market and the Singapore dollar over the long term.
But investing in our home also goes beyond the stock market. That is, supporting the social sector is just as important as investing in the financial sector. That is why as we kick off the SG60 celebrations, the Community Chest, National Volunteer and Philanthropy Centre and Endowus have teamed up to launch the Invest in our Home campaign to raise awareness and raise funds for local charities and non-profit organisations.
This effort will strengthen the fabric of our society and generate greater social returns alongside financial returns.
Samuel Rhee is group chief investment officer, and Hugh Chung is chief investment officer at Endowus, a digital wealth platform with more than S$10 billion in client assets across public, private markets and pension (CPF and SRS)
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
CNA
17 minutes ago
- CNA
Japan's service growth picks up in July on upbeat demand, PMI shows
TOKYO :Japan's service sector activity rose at the fastest pace in five months in July, thanks to brisk domestic demand that offset a sharp drop in export orders and weaker tourist numbers, a private sector survey reported on Tuesday. The S&P Global final Japan Services purchasing managers' index (PMI) climbed to 53.6 in July from 51.7 in June, marking the strongest expansion since February. A PMI reading above 50.0 indicates growth in activity, while that below the threshold points to contraction. New service business orders grew at the quickest pace in three months, supported by improved customer numbers, according to the survey. However, new export orders fell for the first time since December and at the fastest rate in over three years due to low tourist numbers in July, it showed. Some survey respondents attributed the weak tourist figures to speculative concerns about an earthquake in July. Employment in the service sector was unchanged from the previous month, ending a 21-month growth streak, with some respondents citing labour shortages and budget constraints as challenges to hiring. Price pressures continued to ease in July. Input cost inflation was the slowest in 17 months, while output costs rose at the softest pace in nine months. The composite PMI, which combines manufacturing and services, rose slightly to 51.6 in July from 51.5 in June, marking the strongest overall business activity growth since February. "However, this reflected a steep increase in business activity at service providers, as factory output fell back into indicators were a little less upbeat in July," said Annabel Fiddes, economics associate director at S&P Global Market Intelligence. The U.S.-Japan trade deal announced last month could lift Japanese firms' confidence and consumption to offer "a much-needed boost to the manufacturing economy", Fiddes added.
Straits Times
an hour ago
- Straits Times
Wall Street warning investors to get ready for stocks to drop
The calls are coming amid mounting concerns about the US economy after data showed an uptick in inflation and weakening job growth. NEW YORK - A chorus of stock market prognosticators at some of Wall Street's biggest firms is warning clients to prepare for a pullback as sky-high equity valuations slam into souring economic data. On Aug 4, Morgan Stanley, Deutsche Bank and Evercore ISI all cautioned that the S&P 500 Index is due for a near-term drop in the weeks and months ahead. The predictions come after a furious rally from April's lows that propelled the gauge to levels it has never seen before. Morgan Stanley strategist Mike Wilson sees a correction of up to 10 per cent this quarter as tariffs hit consumers and corporate balance sheets. Evercore's Julian Emanuel is expecting a more substantial decline of as much as 15 per cent. And a team at Deutsche Bank led by Parag Thatte notes that a small drawdown in equities is overdue considering they've been on a tear for over three months. 'Over the last couple of weeks, we have noted that investors should expect a modest pullback in the third quarter,' Mr Wilson said in his note to clients. The calls are coming amid mounting concerns about the US economy after data last week showed an uptick in inflation as well as weakening job growth and consumer spending. In addition, stocks are entering what's usually their weakest time of the year. Over the past three decades, the S&P 500 has performed the worst in August and September, losing 0.7 per cent on average in each month, compared with a 1.1 per cent gain on average across other months, according to data compiled by Bloomberg. In addition, stocks have gotten expensive. The S&P 500's 14-day relative strength index topped 76 last week – its highest point since July 2024 before US stock briefly peaked last summer and above the 70 level that market technicians view as a sign of overheating. Options trading is also showing the fear of a downturn, as hedging against another rout becomes more expensive. Contracts protecting against a 10% decline in the SPDR S&P 500 ETF Trust (SPY) over the next 60 days compared to the cost of contracts hedging against a similar rally is hovering around levels not seen since the regional banking crisis in May 2023. Still, despite the near-term concerns, the warnings come with a big bullish caveat: In the event of a dip, buy it. At Evercore, Mr Emanuel emphasizes that the long-term bull market in stocks is still intact despite expectations for volatility, and he advises clients to stay invested, particularly in companies capitalising on the artificial intelligence boom. Deutsche's Mr Thatte points out that historically the S&P 500 experiences small pullbacks of around 3 per cent every one-and-a-half-to-two months on average, and larger ones of 5 per cent or more every three-to-four months. 'We're buyers of dips,' Mr Wilson told clients. So far, traders are heeding to the advice. The S&P 500 and Nasdaq 100 Index are both up than 1 per cent on Aug 4 after Aug 1's sell-off on optimism that the Federal Reserve will cut interest rates soon. BLOOMBERG
Business Times
2 hours ago
- Business Times
The time is ripe for ETFs on the mid and small-cap segments
SINCE the Monetary Authority of Singapore's Equity Market Development Programme (EQDP) is aimed at uplifting the mid and small-cap sectors, here's a thought – how about some enterprising provider of exchange-traded funds (ETFs) consider introducing ETFs on two market indices that have been around for years and could be the benchmarks for any future unit trusts to beat, namely the FTSE ST Mid Cap and FTSE ST Small Cap indices? It would be fair to say that other than the FTSE Straits Times Index (STI), most investors are unfamiliar with its mid-cap and small-cap stablemates. According to the Singapore Exchange (SGX), the Mid Cap Index 'is a market capitalisation weighted index that tracks the performance of the next top 50 companies after the 30 STI constituents''. The Small Cap Index, in the meantime, 'is a market capitalisation weighted index that tracks the performance of companies listed on SGX that are within the top 98 per cent (by market capitalisation), save for those included in the STI and FTSE ST Mid Cap Index''. In a Jun 18 market update, SGX reported that 'Food Empire, Yangzijiang Financial, Centurion Corporation, BRC Asia and Wee Hur Holdings led the 42 constituents of the FTSE ST Small Cap Index in H1 2025, which has generated a 4.9 per cent total return over the period, marginally outpacing the FTSE Asia Pacific Small Cap Index at 2.7 per cent''. The exchange also reported that the Small Cap Index had a combined market capitalisation of S$33 billion, with S$69 million of average daily turnover (ADT) in the 2025 year to Jun 17, so it has decent size and liquidity. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up The Mid Cap Index appears to be a bit of a laggard – at least until June. In a Jun 26 market update, SGX said: 'SIA Engineering, UOL, Sheng Siong, Raffles Medical and DFI Retail Group have led the 32 constituents of the FTSE ST Mid Cap Index in H1 2025, which has generated a marginal 1.5 per cent decline in total return over the period, lagging the FTSE Asia Pacific Mid Cap Index at 4.6 per cent.'' SGX said the Mid Cap Index had a combined market capitalisation of S$125 billion, with S$340 million of ADT in the 2025 year to Jun 25, so it, too, has decent size and liquidity. ETFs on both indices would benefit retail investors in many ways. First, many smaller firms are largely unknown to the majority of small investors, given the absence of research. Trying to pick winners would therefore be difficult. ETFs would provide immediate diversification and exposure to both segments. They would also complement the EQDP's efforts to raise the profile of these firms. Another justification is that the timing is opportune. Smaller companies tend to be more highly geared, and therefore more sensitive to interest rates. Small shifts in rates can have a profound impact on their bottom lines, so rates falling as they are now will very likely translate to better profits for these firms. Currently, exposure to these segments is only available through unit trusts, which may include overseas firms and tend to come with higher fees because of active management. Passively managed ETFs, on the other hand, would charge lower fees while offering the added advantages of greater transparency and intraday liquidity. However, not all mid and small-cap companies are truly investment-worthy. Hopefully, as research coverage improves, the better firms will be selected for inclusion in the indices, which would in turn help sustain interest in any related tracker funds that should be launched.
