Why is Singapore equity attractive to investors? 

Because of its different industry composition, the Straits Times Index exhibits a moderate correlation with the broader APAC markets, particularly lower than markets that are more driven by external demand than domestic demand. The correlation of STI with FTSE Asia Pacific Index has decreased since 2021 (Exhibit 1). 

One explanation of the moderate correlation is that the STI has lower weight in Technology, Consumer Discretionary and Basic Materials than other APAC markets (Exhibit 2). Technology has been buoyant due to the global AI up-cycle, while the performance of Consumer Discretionary (particularly Autos) and Basic Materials is more correlated to the economic growth cycle. Therefore, the correlation of STI with the FTSE Asia Pacific Index has fallen since 2021 when Technology (particularly the Technology Hardware and Equipment sector) began to benefit from work-from-home demand, which was then followed by a rise in AI-driven demand in 2023. During this period, the correlations of Taiwan and Japan to the FTSE Asia Pacific Index was relatively high. 

One interesting pattern seen in Exhibit 1 is that the Indian and Chinese markets also exhibited a relatively low correlation with the broader APAC markets as well as global Technology stocks (Exhibit 3), even though these two markets have large Technology industries. There may be multiple reasons for this, including idiosyncratic shocks such as China’s weakness when re-opening after its covid shutdown. However, from an industry standpoint it is important to note that this was because the more expensive Technology stocks globally are predominantly in Tech Hardware and Equipment, which benefited directly from the ongoing AI up-cycle. However, the Technology stocks of India and China are more concentrated on Software and Computer Services. 

When we compare various characteristics across APAC equity markets, one thing that stands out in the past one to two years is that Singapore’s dividend yields became the highest in APAC, surpassing Australia, which was on average the highest in APAC over the past decade. The dividend yield of the Straits Times Index rose above 5% level in 2023 (Exhibit 4). 

As we discussed in another article about Australia dividend yield (Australian equities – what is a lower dividend yield telling us?), elevated valuations and diminished earnings for Australian firms such as Basic Materials companies were the major reasons for Australia’s falling dividend yield. In the case of Singapore, the index has looked relatively cheap compared to both its past 10-year history range and its regional peers. At the same time, the dividend payout ratio (Exhibit 5) has been stable in the past two years and is around the same as its historical mean (past 10-year average: 46%).

On an industry level, most industries’ dividend yields were larger than 4% – relatively high compared with the APAC average of 2.5%. The two largest market cap industries, Financials and Real Estate, paid dividend yields at 4.9% and 5.5%, respectively, as of November 2024 (Exhibit 6). Technology accounted for only 1.0% of the total index as of November 2024, while Financials and Real Estate accounted for 56.3% and 15.6%, respectively.

The Straits Times Index also has a low volatility characteristic, mainly due to its high weight in Banks stocks and low weight in more volatile sectors like the Technology sectors. The STI became even less volatile in the past two years, and is now one of the APAC markets with the lowest volatility (Exhibit 7). With a high dividend yield, the low volatility characteristics can be especially attractive in a rate cut cycle when equity market volatility can rise amid various geopolitical risks and uncertainty around the global economic outlook. From a longer-term perspective, demographic shifts to an aging population have raised demand for investment opportunities that offer lower volatility and higher dividends. According to OECD [1], the elderly population in OECD countries grew from around 11.5% to almost 18% over the past 30 years. 

The valuation of Straits Times Index is relatively low compared to its APAC peers, and even more so compared to developed market peers. After recovering from the distortions of the Covid pandemic, the trailing P/E ratio is 13.0x as of November 2024, around the same level as the pre-pandemic average (Exhibit 8). One major characteristic of the Singapore market is a stable valuation – which is an important element for income investing strategies.

When compared to other APAC markets (Exhibit 9), the relatively low valuation can be attributed to its low weight in Technology and other growth stocks. Additionally, the growth outlook for DM markets is naturally less strong than high-growth emerging markets such as India and Indonesia.

If we compare the valuation and return at the same time (Exhibit 10), the Straits Times Index also looks attractively valued. The valuation of STI is one of the lowest among the APAC markets, while the ROE is relatively high, especially when compared with its ASEAN peers, many of which also have relatively high industry weights in Financials.

The Straits Times Index offers an investment opportunity to diversify regional concentrations in Technology and conventional cyclical industries such as Basic Materials, Consumer Discretionary, and Industrials. Some industries, such as Technology, are relatively expensive and more heavily positioned among global investors. In addition, the index’s 5% high dividend yield and low volatility can be particularly attractive for income-focused investors amid a rate cut cycle and demographic shifts as a defensive investment option. Lastly, the Singaporean equity appears to be attractively valued compared to its own history and regional peers, particularly ASEAN peers. 

[1] OECD (2024), "Elderly population" (indicator), https://doi.org/10.1787/8d805ea1-en (accessed on 19 November 2024).