What’s ahead for the Straits Times Index?

STI trading at its highest level since April 2018

Headlines around the Straits Times Index (STI) lately have revolved around the index punching above its key 3500 level to deliver its highest close since April 2018. Over the past month, 27 out of its 30 constituents are the in green, with strong performance sighted across the REITs sector, alongside index heavyweight such as DBS (+6.7%), OCBC (+6.7%), UOB (+5.2%), Singtel (+11.5%) and SGX (+7.2%). You may read more about our previous views on Singapore REITs here: https://www.ig.com/sg/news-and-trade-ideas/s-reits--are-we-finally-seeing-a-turnaround--240826

A confluence of tailwinds currently stands in place for the broader index, which includes the potential for catch-up performance with its global peers, increased traction for its composition of dividend-paying stocks amid lower bond yields and ongoing authorities’ focus to increase its value proposition for investors. With Singapore’s 10-year bond yields dragged to its lowest since April 2022 of 2.4%, the STI’s current dividend yield of 4.3% may seem more attractive.

Back in early August, an equities market review group was also set up by the Monetary Authority of Singapore (MAS), with the aim of boosting the country’s appeal for companies’ listing. A potential increase in quality listings and a broadening of market liquidity may help companies realise their value amid their trailing valuation and raise traction among international investors.

Seasonality suggests a general drift higher into year end

This year, the STI has traded somewhat in line with its historical average performance over the past 20 years. Some deviations occurred back in mid-April and most recently, in early-August, where the index powered on with a 12% gain despite a seasonally weaker month. If seasonality were of any guide, historical performance suggests a general drift higher into year end with some short-term blip in October.

SGX fund flow data points to a revival in institutional interest

The recent SGX fund flow data revealed that institutions have been net buyers over the past 5 sessions with S$1.36 billion of net inflows, led by financials, REITs and Telecom (SingTel). Such consecutive weeks of net institutional inflows are relatively rare, which could suggest some long-term bullish positioning for a more sustained turnaround.

*Last week’s net institutional inflows stands at S$579.3 million (not reflected here)

However, uncertainty around Fed’s rate cuts may offer a near-term hurdle

With near-term technical conditions for the STI in overbought territory, the risk-to-reward may seem unfavourable for now, especially with a key market uncertainty ahead of us – the Federal Reserve (Fed)’s rate-cutting cycle this week.

Past historical data (as available) suggests that the performance for the STI tends to be weak following the first rate cut from the Fed. Of course, the extent of post-cut losses depends on whether we are looking at global recessionary risks or not, but nevertheless, it may still warrant some caution against excessive risk-taking for now.

Technical Outlook: Nearing top end of broad consolidation pattern

Currently, the STI is closing in on the 3,641 level, which marked its peak back in April 2018. This also marked the top end of a broad consolidation range dating as far back to 2007. While it can still be too early to say, the near-term technical risk here is a potential bearish divergence formed on its weekly relative strength index (RSI), with the index’s higher highs meeting with lower highs in its weekly RSI.

Buying on dips may seem to be the safer approach, with any retracement likely to leave the 3,446 level on watch as potential support to hold. Much will revolve around the Fed’s meeting outcome this week, with a larger 50 basis point (bp) cut (market consensus ) likely to see the Fed having to walk a thin line in trying to reassure market participants that larger cuts are to bring rates back to neutral amid disinflation, rather than a reaction to greater economic risks.