What Is The Singapore Market Really Made Up Of?
You always hear people saying, “Donno what to buy? Then just buy the market lor”.
But what exactly does buying the market mean? Do you even know what you are buying?
Without appreciating the underlying, things might end up like this Dilbert joke on diversification.
“It would be unwise to invest in just one sick cow, but if you aggregate a bunch of them together, the risk goes away.” – Dogbert
Jokes aside, indexing can still play a key part in our portfolios. Other than tracking the ‘market’, other reasons for investing in an index is for a diversified exposure to a certain country or region.
That said, do you know how major markets have performed in the past 10Y?
Well, let’s find out.
So How Has The Straits Times Index (“STI”) Done Compared To Other Markets?
Source: SGX Securities Market Performance Dec 2016
Interestingly, over a 10-year horizon (2007-2016), you might assume some of the emerging markets to produce much stronger returns. Ironically, the best performer among this list of indices was the Dow Jones Industrial Average (DJIA)! Note: This might not have accounted for Dividends. The Straits Times Index actually produced a loss of 1.3% excluding dividends.
In June 2017, the 30 stocks that made up the Straits Times Index (“STI”) had a total market capitalisation of about S$515 trillion.
Of which the largest 3 were:
- Singapore Telecommunications Limited (“Singtel”): S$64 billion
- Jardine Matheson Holdings Limited: S$65 billion
- DBS Group Holdings Limited: S$53 billion
If you are interested, investing in the STI is available through an Exchange Traded Fund created by State Street Global Advisors (“SPDR”). This is traded on the SGX, named as SPDR STI ETF, with the ticker symbol SGX:ES3.
In the past 10-Year ending June 2016, the SPDR STI ETF has an annualized return (inclusive of dividends) of 2%. However, if we look at it from its inception in 2002, the annualized return (inclusive of dividends) is significantly higher at 7%. This might be because 2006 was just right before the GFC, resulting in the poorer performance.
Now back to our main question, so what are you really buying when you invest in the STI ETF?
Source: SPDR STI ETF
From the Industry Classification Benchmark (“ICB”), 1) Banks, 2) Insurance, 3) Real Estate & 4) Financial Services all fall under the Financials sector and that is a 57% allocation in SPDR STI ETF.
With the 3 local banks making up 37% of the fund invested, you could say that there is a significant concentration in the financial sector.
On top of that, here is some food for thought. Are we really exposed to Singapore when we invest in the STI? The answer might surprise you.
Take Singtel for example, in 2016, Singapore accounted for only 29% of its net profit. Asset wise, companies like Hongkong Land Holdings Limited and CapitaLand Limited also have a significant level of property investments beyond Singapore. That means, even when we are investing in the Singapore Stock Market Index, we are not really investing in the Singapore economy. These are two different things.
What About The Rest Of The Singapore Market?
Based on the data from Singapore Exchange, in June 2017 there were 752 Singapore-listed companies on the exchange. Together, they have a market capitalization of over S$1 trillion! Here is a breakdown of their sector allocations.
Source: SGX Market Statistics Report June 2017
We can see that even taking in the entire Singapore market, the financial sector still takes up 47% of the total market capitalization of the market.
Interestingly, the Singapore market has a very low representation in the technology and basic material industry.
Annual Sector Performance of Singapore Securities (2006-2017)
Source: SGX Securities Market Performance Dec 2016
This a pretty neat chart from SGX, and here’s a link for a better picture.
This chart showed us the performance of various sectors over the past 10 Years. What I noticed is that no sector has consistently outperformed the market.
What Is The Value Here?
Index investing or passive investing funds, are growing 4.5 times faster than active investing funds. It is a strategy that has been gaining popularity in the past decade. According to Moody’s, passive investment already accounts for US$6.0 trillion worth of assets. It also controls about 28.5% of the total asset under management in the US. Investing directly in an index is a simple way to gain access to the market. In fact, it is widely used as a tool for investing into a certain region, especially if you are not so familiar with stock picking within a specific market.
However, before rushing to invest into an index fund, you might want to take some time to appreciate what the fund really holds. It gives you an idea of what industry and geographic markets you are really gaining exposure to. This would give you a better understanding of how diversified your portfolio truly is.
The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in the writer of ValueInvestAsia.com’s capacity. It does not in any way represent those of the company and other related entities. The writer has no position in any companies mentioned above.
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