Few will remember the British jazz-pop band Swing Out Sister. However, some will remember singer-composer Corinne Drewery wrote the chart-topping single Breakout in 1986. She wrote the song while recovering from a fractured skull and under pressure from Mercury Records to produce something over the weekend by the following Monday morning, or risk being dropped. The resulting song was described by critics as a “bubbling dynamic number with irresistible rhythm and power melodic vocals”. This critique was unexpected, as its lyrics suggested:
The time has come to make or break
Move on, don’t hesitate
Breakout
I was surprised that the Straits Times Index (STI) broke above 3,400 during July 2–4 so decisively, as this was a reistance level that had been tested around four times in the past six years.
In March, I had sold some of the STI ETFs purchased through my CPF account at the range’s peak. The returns I made from that sale were multiple times higher than the 2.5% returns offered by the CPF ordinary account and achieved in a third of the holding time. I had hoped to buy back during an anticipated correction to the mid-to-bottom of the 3,100 range. It appears the STI has moved on for now, but I am somewhat relieved that I still maintain some exposure through my dollar-cost-averaged Blue Chip Investment Plan in my SRS (Supplementary Retirement Scheme) account, accumulated over almost 10 years.
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Naysayers, however, point to the tepid volumes to suggest that the local uptick may not last. After all, US markets began to ease off following a shaky debate performance by President Joe Biden, leaving investors pondering the possibility of a return to a Donald Trump presidency come November’s election. Reflecting these concerns, a recent German survey ranking world leaders by their perceived threat to world peace placed Trump at 41%, with Kim Jong Un trailing far behind at 17%, followed by Iran’s Khamenei and Putin at a distant 8%, and Xi Jinping at 7%. Nonetheless, if the STI consolidates above 3,350 points following this early spike in the second half of 2024, we may finally witness the long-anticipated re-rating of the STI, as mentioned in this column.
Whether it was due to repatriations of capital out of the US, an explanation given by news wires for a similar Japanese market surge last week following two months of stagnation, or a rotation into value and profits from artificial intelligence (AI) amid peak US market multiples, as we had speculated, the specific cause did not matter anymore. The market had already made its move.
Banking on an upside
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To be sure, the STI quietly broke out of its range after consolidating from April to June, bolstered by rotation among blue chips. While former market leaders like Sembcorp and Keppel took a back seat in recent months due to post-ex-dividend corrections since May, the three local banks — DBS Group Holdings and Oversea-Chinese Banking Corp (OCBC) — reached new highs, leading the charge ironically at a time when US employment data began to weaken, possibly paving the way for an anticipated Fed rate cut in the coming months, potentially aligning with the US election.
Apparently, local investors suddenly realised that the “higher for longer” scenario was translating into supernormal profits and dividends for our local banking trio — just as forward interest rate curves began to flatten and dip. Analysts and investors might have finally recognised that the steadfast delivery of robust profits and dividends by our local banks held more value than the speculative growth of AI technologies, which have yet to translate into comparable profits. Indeed, in a more uncertain geopolitical or economic environment, there is merit in sticking with the tried-and-tested — even if it may seem “boring”.
An intriguing analysis by The Economist in July concluded that beyond the excitement about AI revolutionising the workplace or speculation about when the world will achieve AGI (artificial general intelligence) — where machines surpass humans — the Big Five tech firms (Alphabet, Amazon, Apple, Meta, and Microsoft) are collectively investing up to US$400 billion ($539.9 billion) in AI-related hardware and R&D. However, as the article notes, “so far the technology has had almost no economic impact”.
For now, Nvidia can continue to benefit from firms investing in capital expenditure and AI chips. However, optimistic forecasts indicate that Big Tech’s earnings from AI investments may only materialise after 2032. Goldman Sachs says the share prices of potential AI users and beneficiaries have lagged the S&P 500 by 50% since 2022. If the anticipated economic value, productivity gains, and employment savings attributed to AI fail to materialise, “Big Tech’s plans will start to look as extravagant as its valuations”, says The Economist.
The Singapore story takes off
Since the inauguration of our 4G (fourth-generation) Prime Minister in May, Singapore Telecommunications Z74 (Singtel), a cornerstone of Singapore Inc, has provided reasons for optimism among its stakeholders. Chew on This noted in May that Singtel’s trading range of $2.30–$2.50, which essentially reflects the value of its overseas holdings, including Airtel, while its Singapore operations were seemingly valued at zero, underscores the company’s undervaluation. The commitment to future additional dividends through capital recycling and investments in data centres with KKR has temporarily diverted attention from issues with Optus in Australia. Singtel’s 15% surge to $2.90, given its substantial weight on the index, also played a significant role in a technical move accounting for at least 35 index points.
Smaller in market cap but still contributing to index gains, ST Engineering has risen beyond the $4 mark to over $4.30. Singapore Airlines C6L has surpassed $7, while Sats, amid its business turnaround, is approaching $3. As these leaders pause at their breakout levels, there is optimism about further upward movement, possibly towards 3,600. This could prompt a “kung fu recycling” for index laggards this time around, including Genting, Keppel and Sembcorp.
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So far, regional names like Wilmar International F34 and Thai Beverage Y92 have been left behind, moving in the opposite direction. Perhaps they deserve closer attention. As discussed in last week’s “Battle for Midway” article, I plan to take profits from large-cap stocks on the upswing and potentially find value in undervalued mid-caps. If the breakout continues gaining momentum, there might eventually be a trickle-down effect for investors seeking alpha rather than simply following momentum. If not, these overlooked gems may have limited downside from current levels.
But is everything hunky-dory?
Some of us are familiar with the rewarding blue-chip STI story. Its consistently low volatility in a stable yet predictable market provides annual returns of 6%–7% (inclusive of dividends) for investors like myself who compound SRS savings through monthly STI investments.
Furthermore, my thesis has repeatedly been validated that reasonably safe trading ranges of 3%, 5%, or even up to 10% for bellwethers like Singtel and SIA can be consistently captured from blue-chip stocks of well-managed companies, provided one adheres to trading in the liquid top STI stocks.
This strategy is particularly appealing for risk-averse traders, especially since it helps avoid the very volatile 50%–70% collapses seen in US and Hong Kong blue chips after equally impressive rallies. Even if the timing of entry is off, holding onto stocks long enough to benefit from dividends can still be rewarding. A reader of this column and a friend, who has more patience than I do, recently reminded me that Yangzijiang Shipbuilding was a three-bagger for him.
With this in mind, why have there been numerous expressions of disappointment regarding the local market’s performance from stakeholders, industry associations, and pundits? The headline from Deloitte stating that Singapore had the worst IPO record in Southeast Asia for 1H2024, as analysed by the auditor, may have dealt a blow to our national pride. The comparison with Malaysia, which had 21 IPOs during the same period while Singapore had only one, likely exacerbated the sentiment. It is akin to seeing the scoreline of a football match between the Singapore Lions and their arch-rivals, the Tigers, across the Causeway.
Paradigms revisited
For readers following the public discourse on revitalising the Singapore market, there was disappointment when Minister Chee Hong Tat reiterated, in response to a parliamentary question, that our sovereign wealth fund, which manages Singapore’s reserves, should continue its global deployment. He emphasised the importance of nurturing and attracting good companies to list here as part of the solution. Some feel this approach may not address the lack of sustainable demand in our local marketplace, drawing comparisons to Japan’s strategy in 2014. Back then, the Government Pension Investment Fund’s allocation to domestic stocks was seen as pivotal in revitalising the Japanese market today.
Indeed, readers familiar with the discussions in “It only takes a spark” (Chew on This, July 4, 2022, issue 1042) and elaborated further in “Gazing at the abyss” (Chew on This, July 11, 2022, issue 1043) would recognise that the minister’s response aligns with our advocacy. It is not about deploying our reserves locally to create a “free lunch”, as previously pointed out. Rather, it is about developing a systematic approach to enable some of our domestic savings from CPF, insurance and pension funds to be allocated here, thereby stimulating demand and revitalising the ecosystem. Without such a mechanism, we risk further hollowing out our market, necessitating structural re-engagement within our system.
Chee is also correct in emphasising the importance of attracting quality companies to IPO locally. Realistically, the strongest and largest firms often opt for the vast pools of capital in the US — like Sea, which has thrived since its 2017 listing, or Grab, which amassed significant funds despite years of losses. However, companies supported by private equity and venture capital that are unable to achieve big-cap status require alternative exit avenues.
Hence, there is a pressing need to revitalise our ecosystem to facilitate successful IPOs for smaller companies here. Small and mid-cap firms often face challenges sustaining capital raising in the vast US market. In Australia or Hong Kong, they languish as “orphans” with minimal opportunities for secondary fundraising to support growth, even if their IPOs initially succeed. Many ultimately choose to delist or sell their shells.
If these innovative SMEs can secure the growth capital needed to expand, create jobs, and achieve fair valuation, they could leverage their listed stock as currency for further growth. This potential could propel them to become regional champions. To address the various challenges, including the chicken-and-egg dilemma, we must break free from our current paradigms.
Chew Sutat retired from Singapore Exchange S68 after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore
