Why the Singapore Stock Market May Deliver Better Returns with Less Risk

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Feb 07, 2012
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As you may know, we have developed a global market valuation page where you can find the expected returns from the stock markets of the 18 largest economies in the world. This is an extension from our pages of U.S. market valuation based on the ratio of total market cap over GDP and Shiller P/E.

If we look at the page, the stock market in China seems to be positioned for the best future returns. The projected return is more than 27% a year over the next decade or so, as China has demonstrated tremendous economic growth. Its stocks are traded at about the lowest valuations in a decade. We will discuss China later in a different article.

In this article we would like point you to Singapore. Located in Southeast Asia, with an area of only 224 sq. miles and a population of 5 million, Singapore enjoys a very competitive economy, stable political environment and fast economic growth. The expected return from Singapore's stock market is the highest among all the countries with a relatively mature capitalism and stock market, as shown in the chart below. Singapore is highlighted in the chart. The expected return can be as high as 17% a year over the next decade.

The details of how we come up with the results can be found in our new global market valuation page. The contributions are from three factors: economic growth, dividend and the market valuation reversion to the mean.

Singapore's economy has demonstrated strong and relatively consistent growth over the last 25 years. The average growth rate over the past eight years was 8.15%, as shown in the chart below:

Over the past 25 years, Singapore's GDP grew by more than 600%. However, the total market cap grew by less than 300%, as shown below:

This leaves the current market valuation at the lower end of its valuation in 25 years, as shown in the chart below:

Only during the Asian market crisis in 1998, the Internet bubble burst in 2001-2003, and the financial crisis in 2009, were the valuations of the Singapore market were lower than the current level.

Of course, the country may not be able to continue its past growth. While it is never certain that the future growth will be the same as the past, even if the growth rate slows from its current average of 8% to 5%, Singapore's market is still more attractive than the U.S. market, as the market is at the lower end of the historical valuation and the stocks pay better dividends.

For comparison, the U.S. stock market valuation is now above its historical mean; a reversion to the mean will produce negative contributions to the total returns. At the same time, the economic growth is slower, and the stocks pay lower dividends. The expected annual return is around 4% a year.
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