Investing in Singapore vs USA - is it necessarily better?
It's been awhile since I have done any broad-market research. To be honest there isn't really anything intriguing about it. Everything, including market movements, my predictions, game plan, etc. that are Covid-related are all documented in my pandemic post 5 months ago here :
https://bryanrong5.wixsite.com/finance/single-post/2020/03/18/My-first-financial-crisis-and-pandemic
If you had took something out of it, you should be sitting at a pretty tidy profit right now, but that's not the point of this article.
Today, as of writing, the Dow Jones Industrial Index is down 3.23% Year-to-Date (YTD), while our domestic Strait Times Index (STI) is down 22.08% YTD. So we lost by about 19%, what gives?
The reason - in my opinion - for this appalling difference came pretty easily to me, because that is the reason I invested in the US market in the first place. The answer is Tech.
Since the time Singapore became independent, we are nowhere close to being a technological industry by any means. Yes, time to time we have some technological footprints here and there, such as Venture, Creative, Micro-Mechanics, and AEM. Their following market capitalization are as follows:
Venture: 5.85b
AEM : 1.1b
Creative: 212.25m
Micro-Mechanics: 278.06m
The STI market cap is 288.8b. Only Venture is included in our market index. I don't really see any other companies I would classify them as tech-related. Our tech exposure in the market index is thus approximately 2%.
On the other side of the world, we have:
Apple: 2517.6b
Microsoft: 1758.1b
Visa: 491.6b
Intel corp: 243.3b
IBM: 143.2b
Cisco: 225.3b
The DJIA market cap is 8.33 trillion. Tech-related companies above(identified on my discretion, feel free to dispute this) makes up approximately 5.377 trillion of the index's market cap, which is about 64.5%. Even if we just take Apple and Microsoft, they would already make up about half of the index's weight.
Okay, before you guys start shitting on STI ETF and shorting the Singaporean market, let's not be too hasty and look at this table I have drawn up for the second half of our discussion - is the US market really better than the Singaporean market?
https://docs.google.com/spreadsheets/d/1v5dM7ODk3Yph94ZzjfifTciF687drvbnTK7_VeS5Dfc/edit?usp=sharing
NOTE: Prices in the sheet updates LIVE, so there might be changes at some point in time with regards to the % discussed, or even very different if you are reading this article at some much future date. Regardless, I will keep the final % value static.
As you can see, STI ETF is extremely finance-dominated, making up 61.75% of our index. Obviously, with all the Covid situation that is going around, this sector is going to be one of the worst hit industries, being slapped with interest rate cuts, defaulting loans, loan moratoriums and such.
Here, I will attempt to compare apples with apples, so in order to make the US market more reflective of what the SG market looks like, I have taken the top 3 by market capitalization and/or similar companies in the US market to compare to our sectors. For example, I have picked JP Morgan, Bank of America, and Citi and averaged them to compare to our Financials sector. That should help you understand the table better.
From the sheet provided, at the bottom, you can see that the STI ETF's performance for the year of -22.08% actually beats the US-adjusted returns of -23.6%. This is not to say our market is better than USA of course, and the difference is too minimal to make a good conclusion on that as well.
However, my point is that the Dow Jones Index, which seemingly beats our STI by 19% YTD, would actually be performing worse by 1.6% should our industries weight be similar. It does not even help that their constituents, such as Boeing, General Electric, Walmart, JP Morgan, are all companies that are much, much larger than our local comparable.
Does this means the SG market is undervalued? Or the US market is overvalued? We can't tell for sure, but I would say this analysis swings a strong one in the direction of market efficiency. Markets where it's constituents are less impacted by Covid are performing better, while finance-dominated market like ours are hit hard.
Personally, in a post-Covid economy, I would say that the gap in these movements are bound to tighten, albeit with some permanent outperformance in the US market - because of tech. This is because should the economy recover, tech's durability in a Covid environment will be less pronounced, while economic velocity will encourage bank's profits. In that case, a finance-dominated index like ours would definitely soar faster than one that isn't.
The recovery of our STI ETF is thus extremely dependent on the economic activity that underpins the profit of financial institutions, one that will have much greener pastures once the Covid is over.
If you want to know, yes I am very well vested in SGX. In fact financials makes up over 50% of my domestic portfolio, so I do believe that these plays are fine in the long haul. I do not particularly prefer one market over the other simply because of short-term performances.
That said, this article also highlights the importance of diversification. I have significant holdings in the S&P500, DIA, and also other US & Europe equities, simply because I do not believe our index diversifies enough - see the lack of tech above. I feel that foreign markets provide access to something that our domestic market lacks, and that is the reason why I invest in them, not because they 'shoot up faster', 'can keep printing money', 'higher volatility to buy low sell high', or any other coffee-shop uncle reasons that one might have.
And you should too :)
Happy investing!