What’s ahead for the Straits Times Index?

What’s driving the STI?

The first trading week of 2025 has seen the Straits Times Index (STI) extending its gains by close to 2%, with the index’s heavy exposure to banking stocks working well in its favour. The three local banks, DBS, OCBC and UOB, now account for more than 50% weightage in the STI and fresh record highs in their respective share prices have been a major tailwind in driving the broader index performance, displaying a similar trend to that of 2023.

The combination of bullish factors supporting the STI includes:

Stronger banks’ earnings prospects

Concerns that the banks' net interest income could decline rapidly amid the Federal Reserve (Fed)'s rate-cutting cycle have eased, following less dovish expectations from the Fed. Thus far, the totality of US data hints at economic resilience and persistent last-mile inflation, which supports the case for a more gradual pace of rate cuts. Market rate expectations are now leaning into just one 25 basis point (bp) cut from the Fed through 2025, revised down from the three cuts priced just a month ago.

This high-for-longer rate outlook is likely to offer a more favourable environment for the banks’ net interest income ahead, while growth momentum in fee and commission income is expected to stay robust. Consensus is looking for another quarter of strong 4Q banks’ earnings ahead, with yet another double-digit year-on-year growth in net income expected across the trio.

Inexpensive valuation, attractive income proposition

Despite its outperformance through 2023, price-to-earnings valuation for the STI remains inexpensive, with the rally well-supported by strong earnings growth. The index has offered an attractive income proposition as well, with dividend yield more than 4% being one of the highest among key Asian markets, attracting investors seeking stable returns.

Optimism surrounding the Johor-Singapore Special Economic Zone

Business-friendly initiatives around the Johor-Singapore Special Economic Zone may uplift sentiments for Singapore equities, with the collaboration bringing about better synergies in terms of resources such as labour talent and technological innovation.

Singapore businesses could enjoy potential cost savings and an easier pathway to expand into the larger Malaysian market. Financial institutions may benefit if demand for borrowing or cross-border financial transactions increase. REITs and property may benefit if there are increased cross-border mobility and expansion of business operations.

Attention from authorities in reviving Singapore’s equities marke

Late last year, Singapore’s central bank has established a task force to evaluate measures to “improve the vibrancy” of the Singapore equities market. While specific initiatives have yet to be unveiled, the formation of this review group represents a positive step toward addressing longstanding issues, including low trading volumes and a high delisting rate.

What’s next?

Given their substantial weight in the index, the local banks are poised to remain the key driving force behind further STI’s gains. A more inflationary environment in the US, coupled with resilient economic data, could reinforce the narrative of slower Fed rate cuts—a stance likely to be echoed in US policymakers’ rhetoric as well.

While there is the likelihood that the Fed may eventually turn more aggressive in its rate easing process than currently anticipated, this may not take place anytime soon. For now, policymakers may proceed cautiously with further rate cuts, considering the prevailing economic data trends and the need for greater policy certainty from the incoming Trump administration. In this context, the narrative of higher rates for an extended period could continue to support the banking sector.

Inexpensive valuation relative to other APAC markets also suggest room for multiple expansion, coupled with the index’s status as a stable income play within the region.

Technical analysis: Singapore Blue Chip trading within rising channel

The Singapore Blue Chip Index continues to trade within a rising channel pattern, with recent interaction with the lower channel trendline seeing buyers stepping in to hold the upward trend. Earlier technical reset of its daily relative strength index (RSI) back at the midline was also met with some defending, with a renewed move back above the 50 level reflecting buyers in control.

Ahead, the 2024 high at the 381.73 level is currently being retested, with any upward break to a new higher high paving the way for the index to target the 400.00 level next, where the upper channel trendline resistance is likely to come into play. On the downside, the 370.53 level serves as a crucial support confluence from its 50-day moving average (MA) and the daily Ichimoku Cloud.