We live in interesting times.
With the pandemic slowly receding and major economies reopening, optimism has flowed into the Singapore stock market.
Even the threat of inflation and the prospect of higher interest rates have not dampened the enthusiasm.
The bellwether Straits Times Index (SGX: ^STI), or STI, has risen by 9.5% year to date.
In contrast, the S&P 500 Index in the US has declined by 6.8% over the same period, while the technology-heavy NASDAQ Composite Index has fallen by close to 11%.
The STI has even surpassed its highest level of 3,407.02 in 2019; it was surpassed just a week ago when the index closed at 3,420.
Investors may wonder if this momentum can continue?
Does the STI have much more room to run?
Banking on the lenders
The bulk of the index’s weight is focused on Singapore’s three big banks.
The three lenders make up almost 44% of the index, and exert a heavy influence on its direction.
DBS Group (SGX: D05) and United Overseas Bank Ltd (SGX: U11), or UOB, have just reported stellar sets of fiscal 2021 (FY2021) earnings.
DBS reported a record S$6.8 billion in net profit for FY2021 and also upped its quarterly dividend to S$0.36 per share.
Not to be outdone, UOB reported S$4 billion of net profit and also hiked its final dividend above 2019’s level.
OCBC Ltd (SGX: O39) will release its results on 23 February and is widely tipped to do well.
Both DBS and UOB flagged rising interest rates as a strong tailwind for growth, while also announcing healthy year on year increases in their loan books.
The share prices of both lenders have been hitting new all-time highs above S$37 and S$32.50, respectively.
Should their earnings momentum continue for all three lenders, it will act as a strong push for the STI to rise further.
Other heavyweights doing better
Let’s not forget the other blue-chip companies that make up the index.
Singtel (SGX: Z74), Singapore’s largest telco, takes up a 6.3% weight within the STI.
The group recently released its fiscal 2022 (FY2022) third-quarter business update and reported that its underlying net profit for the first nine months of FY2022 had climbed by 12% year on year.
Last year, the telco had announced the sale of a 70% stake in its Australian tower assets as part of its ongoing strategic review.
As economies open up, Singtel should also enjoy higher roaming revenue and enjoy greater demand for its digital services.
Meanwhile, CapitaLand Investment Limited (SGX: 9CI), or CLI, and Singapore Exchange Limited (SGX: S68), or SGX, occupy a 3% and 2.8% weight within the STI, respectively.
CLI had disclosed healthy financial and operating metrics during its fiscal 2021 third quarter (3Q2021) business update.
Funds under management grew by 9% year on year in the first nine months of 2021 (9M2021) while fee-related income surged by 34% year on year.
The real estate firm’s capital recycling initiatives generated around S$3.1 billion in capital for redeployment.
Elsewhere, SGX also reported a decent set of earnings for its fiscal 2022 first half and is positioning itself well for medium-term growth with its six divisions.
Relying on the REITs
REITs are yet another area that could provide a lift to the STI.
There are a total of seven REITs within the index, and these hold a combined weight of around 14.6% of the STI.
Some examples include Ascendas REIT (SGX: A17U), Singapore’s oldest industrial REIT, Frasers Logistics and Commercial Trust (SGX: BUOU), or FLCT, and Keppel DC REIT (SGX: AJBU).
All three REITs above reported higher year on year distributions per unit (DPU).
The three Mapletree REITs are also included in the STI, namely Mapletree Industrial Trust (SGX: ME8U), Mapletree Logistics Trust (SGX: M44U), and Mapletree Commercial Trust (SGX: N2IU).
The Mapletree trio also reported healthy portfolio metrics and rising DPU, capping off a successful year for most of the REITs within the STI.
Should their DPU track record continue, it should lift the REITs’ unit prices and provide a further boost to the index.
Get Smart: This index has legs
There’s a great reason why the STI has posted an impressive performance of late — earnings have been climbing higher for the majority of its components.
And as the recovery gains traction, more blue-chip companies look poised to post even higher profits and pay increasing dividends.
There’s room for the index to rise further as the year sweeps by, and we look forward to seeing it break new records soon.
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Disclaimer: Royston Yang owns shares of DBS Group, Singapore Exchange Limited, Frasers Logisitics & Commercial Trust, Keppel DC REIT and Mapletree Industrial Trust.