Finding the bottom of the Straits

Singapore’s Straits Times Index has fallen significantly from a peak of more than 3,500 back in early 2015 to 2,632 (at present). So, where is the bottom?

As the Straits Times Index (STI) has fallen more than 20% from its peak, it is considered as a “bear market”. Short sellers are currently shorting this market (refer to: https://us.rd.yahoo.com/finance/external/cnbc/SIG=112m5g707/*http://www.cnbc.com/id/103355868?__source=yahoo%7cfinance%7cheadline%7cheadline%7cstory&par=yahoo&doc=103355868)

Seriously, where is the bottom?

Technical analysts may use different indicators to project the final bottom. One may use Support lines to project future rebounds. We may see strong support at 1,600-1,800 (that coincides with the 2008 financial crisis).

SGX_9 Feb

I do believe in technical analysis. However, I am more of a fundamentalist. Let us frame the STI from fundamental perspectives:

A simple question – what is your view on the long term future GDP of Singapore?

I am not a qualified economist. Keeping things simple, just trust someone else to do the job. For desktop forecast, please refer to http://www.tradingeconomics.com/singapore/gdp-growth/forecast

SG GDP Forecast

Frankly, it is not unreasonable to assume the long term GDP growth rate of Singapore to range about 2.0 – 2.25%.

So what is next:

We may employ the method Justified P/E to determine the fair value of STI. Refer to http://seekingalpha.com/article/3239016-justified-p-e-ratio-why-its-my-go-to-valuation-tool?page=2

Justified P/E is based on the formula:

Fair P/E = (1-Div Payout) x (1 + Growth Rate) / (Cost of Equity – Growth Rate)

Let’s analyse the current components of STI index

STI Components 9 Feb 2016

From the above table, STI is currently trading at P/E of about 11.55x, P/B of 1.09x, Div Yield of 4.11% and div payout of 47.41%.

What is a fair PE for STI:

  1. Based on the justified PE formula, the implied current growth rate is 3.95% (based on dividend payout of 47.41% and assumed cost of equity of 8.7%)
  2. If we assume the long term growth rate of STI to equate the forecast GDP growth rate of 2.0%, we may see the fair value of STI to be around 1,821.78
  3. If there is slight optimism in global outlook and somehow people believe that Singapore can achieve 4.50%-5.0% in terms of GDP growth rate, we may see a positive rebound in the STI to a range of between 2,980 and 3,400.

Summary SGX

Key Implications

This is a quick-and-easy method in predicting the fair value for the index. Hence, it will be prone to errors. For future research, I would dwell into the detailed analysis of each of the component stocks of the STI index in order to have a detailed forecasting of the STI index. Since Singapore is an open economy we should continue to monitor the macro indicators.

 

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Author: Ken Utau

Data Scientist, Markets Analyst and Food Lover

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