Can Singapore’s STI Exceed its Pre-COVID High?

Singapore investors have had a good start to 2022.

The bellwether Straits Times Index (SGX: ^STI), or STI, has managed to climb as high as 5.5% to 3,294.86, driven by the strong share price performance of the trio of local banks.

As the world’s economy recovers, blue-chip stocks within the Singapore index could enjoy a much-needed respite.

Consumer demand could start to increase as the year wears on, pushing up spending on goods and services.

We could see a semblance of the return to pre-pandemic days as the outlook turns brighter.

Back in April 2019, the STI hit a year-high of 3,407.

As businesses adjust to the new normal, they should also start to report higher revenue and earnings.

Could the STI shoot past the 3,400 mark and exceed its pre-COVID high?

The dance of the heavyweights

Source: FTSE Russell FTSE ST Index Series website

Let’s take a methodical approach to see how the index can perform this year.

From the table above, it can be seen that the trio of local banks, namely DBS Group (SGX: D05), United Overseas Bank Ltd (SGX: U11), or UOB, and OCBC Ltd (SGX: O39), make up a combined 43.7% of the index.

This heavy tilt towards lenders suggests that a good performance from our local banks should contribute to a significant rise in the STI.

Thus far, both UOB and DBS have hit new all-time highs while OCBC is hovering close to its 52-week high.

UOB had just announced the acquisition of Citigroup’s (NYSE: C) consumer banking business for nearly S$5 billion, which will boost its income and net profits moving ahead.

Meanwhile, all three banks should also enjoy the tailwind of higher interest rates as the US Federal Reserve moves to tighten its monetary policy as inflation flares up.

Management has been sanguine about prospects this year, believing that rising rates should translate to higher net interest margins and hence, higher net interest income.

Coupled with healthy loan growth as economies slowly reopen, the local lenders are likely to enjoy healthy growth in their top and bottom lines.

The allure of regular distributions

The index currently has seven REITs, and together, this sector makes up close to 15% of the STI by weight.

Some of the REITs within the index include data centre REIT Keppel DC REIT (SGX: AJBU), industrial REIT Mapletree Industrial Trust (SGX: ME8U), or MIT, commercial and industrial REIT Frasers Logistics & Commercial Trust (SGX: BUOU), or FLCT, and retail and commercial REIT CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT.

Income-seeking investors continue to favour REITs as a great vehicle for a consistent stream of passive income.

Regular quarterly or half-yearly dividends paid out by REITs make them a popular choice for investors who are looking for additional cash inflow.

And the REITs mentioned above have not disappointed when it comes to increasing their distributions.

Recently, Keppel DC REIT reported a 7.4% year on year increase in its distribution per unit (DPU) for the fiscal year 2021 (FY2021) to S$0.09851.

FLCT also saw a near 8% year on year rise in its DPU to S$0.0768 for FY2021.

Should other REITs also report higher DPU, their unit prices should steadily rise in tandem.

Catalysts galore

Let’s not forget about the other stocks within the STI.

Some of them have clear catalysts that could either unlock value for shareholders or transform the business to help grow profits.

For instance, telco Singtel (SGX: Z74), which has a 6.3% weight in the STI, sold off a batch of its Australian tower assets for A$1.9 billion late last year as part of a strategic review to unlock value.

Keppel Corporation Limited (SGX: BN4), an offshore and marine conglomerate, is planning to restructure its oil and gas division and is exploring a merger with Sembcorp Marine Ltd (SGX: S51).

And Singapore Technologies Engineering Ltd (SGX: S63), or STE, is forging its new growth path as it lays out its plans for the next five years during its recent Investor Day.

These events could lead to higher reported profits, thus propping up the share prices of these stocks and giving a boost to the STI.

Get Smart: A strong probability

The analysis above points to a good chance that the STI can eventually exceed its 2019 level.

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Disclaimer: Royston Yang owns shares of DBS Group, Keppel DC REIT, Frasers Logistics & Commercial Trust and Mapletree Industrial Trust.

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