STI’s new high: A narrow group of companies unlocking value, lifting profitability has driven the run

THE Straits Times Index (STI) reached a milestone of sorts early last week. When the market opened on Monday (Feb 10), the benchmark index hit a new all-time high of 3,921.30.

This surpassed the preceding record high of 3,906.16 set in October 2007, noted the Singapore Exchange (SGX).

One factor that drove the STI to its new high was a surge in shares of DBS, OCBC and UOB – which account for more than half the index. In particular, DBS crossed the S$46 threshold after another strong earnings report.

For me, this did not feel like an event worth celebrating. While the STI is essentially unchanged since just before the global financial crisis, the S&P 500 index has more than quadrupled. Is it any wonder that delistings have outpaced new listings on the local bourse for years?

In any case, the STI did not mark its new high on Monday with much conviction. By the end of the day, it slipped back below the 3,900 threshold. It closed on Friday at 3,877.5.

Still, just casually eyeballing a 10-year chart of the index shows that the local market has regained some vim and vigour over the past 14 months.

Since the end of 2023 (until the close on Feb 10), the STI rallied 19.6 per cent. In comparison, the S&P 500 gained 27.2 per cent while the Dow Jones Industrial Average (DJIA) rose nearly 18 per cent.

With the dividends reinvested, the STI delivered a total return of nearly 26.5 per cent during the period. Again, this compared well with the S&P 500 and the DJIA – which returned 29.1 per cent and 20.3 per cent, respectively.

Will the STI maintain this solid performance in the months ahead? Or will its recent rally soon fizzle out?

More uncertain outlook

My own view is that the global macroeconomic backdrop is becoming less supportive for markets in this region, with the timing of the Fed’s next rate cut increasingly uncertain.

Last week, US inflation data came in hotter than expected. The headline consumer price index for January increased 3 per cent over the preceding 12 months, up from 2.9 per cent in December and 2.7 per cent in November.

More worryingly perhaps, the STI’s rally since the end of 2023 does not appear to have been driven by broad investor enthusiasm. Only 10 of the STI’s 30 component stocks rose during the period (up to Feb 10).

The strongest performer among these 10 gainers was Yangzijiang Shipbuilding, which climbed 100.7 per cent. At the other end of the spectrum was Sembcorp Industries, with a small gain of 1.1 per cent.

The remaining eight stocks that ended the period higher were: DBS (up 49.4 per cent), SGX (up 39.4 per cent), Singtel (up 34 per cent), OCBC (up 33.8 per cent), UOB (up 32.8 per cent), ST Engineering (up 26 per cent), Hongkong Land (up 20.7 per cent), and Sats (up 17.5 per cent)

In comparison, more than two-thirds of the S&P 500’s components, and more than four-fifths of the DJIA’s components, ended the same period in positive territory.

Stocks ebb and flow on a wide variety of factors, of course. Yet, the 10 STI stocks that rose since the end of 2023 hold some useful lessons.

For one thing, increasing profitability is clearly a potent driver of locally listed stocks. Notably, the three local banks have benefited greatly from elevated net interest margins over the past few years, and are now returning substantial amounts of excess capital to their shareholders.

Forging a path to higher profitability and stronger stock returns often requires effort and the stomach for risk, though. For instance, Hongkong Land and Singtel are actively unlocking value and repositioning their businesses, while Sats and ST Engineering have made bold, strategic investments.

The way I see it, the key to a more vibrant Singapore market is coaxing and cajoling more companies to unlock value and improve their financial performance in a similar fashion.

Pump-priming the market?

This brings me to the announcement last week by the Monetary Authority of Singapore (MAS) that the equities market review group formed in August last year has submitted proposals to boost the local market.

“The first set of measures include proposed tax incentives to attract enterprises and fund managers to list in Singapore, and to incentivise the launch and growth of funds with substantial investment in domestic equities,” MAS said in a statement on Feb 13.

Second Minister for Finance Chee Hong Tat also reiterated why the review group is not recommending that GIC use its funds to boost trading liquidity in the local market.

“GIC’s mission is to preserve and enhance the international purchasing power of Singapore’s reserves,” said Chee, who chairs the review group.

He explained that GIC’s mandate already allows it to invest in Singapore companies with a global footprint, and that can generate good returns. “So we should allow GIC to make their investment decisions professionally and commercially, and not require them to have a specific allocation to local equities, if such investments result in lower overall returns.”

Chee added: “I also do not believe that it is sustainable to use such a ‘pump-priming’ approach. I think it is more effective for us to look at how we can strengthen the fundamentals of our market ecosystem, which is what the review group has been focusing on.”

Leave GIC out

Many market watchers might have been disappointed that the review group has chosen to kick off its efforts by proposing tax incentives to draw listing candidates and investors to the Singapore market.

The dearth of new listings in Singapore is largely the result of the market’s abysmal long-term performance; and this weak performance is at least partly the result of many companies simply not doing enough to drive shareholder value, in my view.

These fundamental problems are unlikely to be resolved with the introduction of tax incentives.

It is also rather disconcerting that the idea of GIC allocating funds to the local market is being characterised as “pump-priming”.

One reason many market watchers are enamoured with the idea of channelling a portion of Singapore’s domestic savings into the market is that it might incentivise boards and controlling shareholders to refocus on maximising the market value of their companies.

This column has previously argued that the long-term underperformance of the Singapore market has resulted in a misalignment of interests between controlling shareholders and minority investors. Why strive for stronger profitability if your public-listed company cannot garner a higher valuation than it would in the private market? Why not just try to take the company private on the cheap?

Under the circumstances, it might be best if GIC were left out of the national effort to revitalise the market. It would probably be much less controversial if some other government-linked entity – perhaps a special purpose vehicle under the Ministry of Finance – were used to create a more vibrant local market ecosystem and the economic benefits that could come with it.

Whatever the case, the review group looks set to keep making headlines this year.

The timing of MAS’ announcement last week was clearly driven by the upcoming Budget statement, which is scheduled to be delivered on Feb 18. MAS said the review group will provide more information about the proposed tax incentives on Feb 21.

MAS also said it will continue to work on the next set of measures to foster the longer-term development of Singapore’s equities market. These will be presented in the second half of 2025.