Why the STI has so many flaws and why investors should look elsewhere

It has been a very good several months for the S&P 500 – returning 7% in August after 5 consecutive months of gains; although the same cannot be said for our local Straits Times Index.

Many Singaporean investors start out their investing experience in Singapore stocks – maybe because the majority of the financial content we have in the blogosphere and in social media is focused on local investments.

Or maybe because we are more familiar with local businesses and brand names like DBS, SingTel, CapitaLand and Mapletree. This home bias may manifest itself in poor investment outcomes because investing only Singapore restricts your investment to a tiny part of the world.

There is a case for investing overseas.

In the last 10 years post the financial crisis, the local stock market, benchmarked by the STI, has returned a mere 1.97% (unfortunately the poor performance was thanks to COVID).

Compare this performance to the US stock market, benchmarked by the S&P 500, which saw close to a 15% 10-year return figure.

Of course, one has to consider some of the loose monetary policies and huge debt that the US has and whether the trend will mean-revert in future.

SPY fund returns against benchmark (S&P 500)

What are the flaws of the STI?

Firstly, the components of the index, which benchmarks the local stock market, is lacklustre. The STI is constructed to only take the largest 30 companies listed in Singapore, compared to 500 in the S&P 500.

The top 10 holdings are largely financial institutions and real estate companies, of which the majority are skewed towards the financial sector.

How many of these companies are globally competitive and serve a large segment of the world population?

Our three local banks make up close to 40% of the index, and at best, they have strong regional presence but limited global reach today. What about the future? Would they able to grow earnings faster than global firms with diversified product lines like Microsoft, Alphabet, J.P Morgan and Unilever?

Secondly, having only 30 companies in the index is also not representative of the local market. When investors trade on the index, they are allocating their assets to the same 30 companies in their proportionate weights. Are these representative of our economy, where we are increasingly reliant on tech companies for growth, but they are either private or listed elsewhere and not represented by the STI?

Thirdly, high commissions to trade Singapore stocks among local brokerages have been not ideal for many years. When it’s difficult and expensive to trade, Singapore stocks are less liquid, easily manipulated (especially penny stocks) and ultimately unattractive for investors to take up shareholding rights.

Why would they own a huge local portfolio if these shares don’t get properly priced by the market and a large sell order can easily distort the order books?

Perhaps lastly, it’s about opportunity cost. As investors with a limited timeframe, unlike a company which can survive across multiple generations, we simply cannot wait decades for the company to turnaround. When funds are locked in an investment, it’d better produce an investment return as efficiently as possible, otherwise I’d deploy my money elsewhere that’s a better alternative.

It’s important to invest without emotions and invest impartially. As much as I’d love to support my local companies, when it comes to investing, we need to make rational decisions, not emotional ones.

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