STI straits times index Singapore and Sensex - BSE India index a comparison
TLDR: Comparing the benchmark indexes of Singapore (STI) and India (Sensex)
As an NRI (Non Resident Indian) currently living in Singapore, there is always the question of where do I invest my earnings.
What is the long term strategy that I should adopt?
Which market is better over the long term?
Should I hold some earnings in SGD as a currency hedge?
Should I diversify my holdings across multiple currencies?
I am sure this is a concern for most residents who are living outside their country, or even to Singaporeans who invest in USD denominated ETFs or GBP denominated assets in the UK. Am I better off sticking to the Singapore market?
I came to Singapore in 2003 with a plan of staying in the country for 6 months before leaving here for good. 16 years later I am still here. That itself is a story on its own for another time.
So for this post today, I am planning to cover the two markets (India and Singapore) that I am interested in via their respective benchmark indexes. Conveniently both track 30 companies in their indexes. So it will be interesting to see who would have come out on top based on the investments in the index.
STI - Straits Times Index
STI - Straits Times Index is the benchmark index of Singapore and is a market capitalisation weighted index that tracks the performance of the top 30 companies listed on SGX.
The 3 banks DBS, OCBC and UOB standout. They have outsized influence on the index given that each contributes greater than 10% of the index. Rest of the companies are fairly well diversified.
Financials dominate at 40%, Industrials at 21% and almost 18% on real estate. Given the fact that Singapore is a land scare country the real estate share of the index is not surprising. I have merged the consumer stables and non durables into a single category for ease of visualisation.
As you can see the financials industry has an outsized influence on the index, even though the market cap is only slightly higher than industrials.
Market Capitalisation = Total Outstanding Shares x Last Traded Price
Net Market Capitalisation = Market Capitalisation x Investability Weighting Factor
Weightage is determined by net market cap of the constituents not total market cap, which causes the difference in influence.
Sensex - is India’s most tracked bellwether index. It is designed to measure the performance of the 30 largest, most liquid and financially sound companies across key sectors of the Indian economy that are listed at BSE (Bombay Stock Exchange) Ltd.
Here again financials seem to dominate the index. I see this trend across countries and indexes. Financials are a major part of any benchmark index.
Number one sector is financials with 36% of the market share, followed by 3 industries with almost identical share
Information tech - 16.5%
Auto - 16.8%
Industrials - (petrochemical and oil) - 14.3%
With reputation of India being the back office / IT powerhouse of the world, I had expected IT to have a larger share of the index, but that does not seem to be the case in SENSEX.
Again the financials dominate when it comes to market cap which is expected based on the weightage in the index.
So what does this all mean when it comes to investing your hard earned money? How they compare with regards to returns.
Frankly I am a little surprised, I would have expected SENSEX to outperform STI by a much wider margin for the 10 year period given India’s status as a developing economy, compared to Singapore which is a developed economy.
Two reason why this marginal outperformance is even worse than the headline figure suggests.
The returns shown here are not real returns, if we were to calculate real returns, after considering inflation, the performance of sensex falls even further. As per stats bureau of India, the average inflation over the last 8 years is 6.31%. So effectively the real return is 10.65 - 6.31 = 4.34%. The number is based on averages over the 8 year period, so there might be minor differences.
Singapore has relatively very little inflation, as per Singstat, inflation from 2011 to 2018 is between 5.2 to -0.5%. with an average of around 1.65% during that 8 year period. So real return of STI is 9.2 - 1.65% = 7.55%.
The returns are calculated based on local currency, but if we were to normalise the returns on a constant currency basis, for simplicity sake I will use SGD as the reference currency.
Rupee has been falling consistently over the last decade against most other international currencies, SGD is no exception.
From 34 rupees to 1 SGD in Sep 2009, the currency has now fallen to 50 rupees to 1 SGD in 2019. That is a massive fall in the Rupee over the last decade.
If I had invested 10,000$ (340,000 Rupees) in 2009 in Sensex, for me to breakeven in SGD terms I would need that to become 500,000 rupees in 2019 not even considering inflation.
Principal = 10,000 SGD 0r 340,000 Rupees (2009 exchange rate of 34)
Period = 120 months
Annual interest rate = 10.65%
Total return = 935,390 Rupees or 18,707 SGD (2019 exchange rate of 50)
What would be my return if I had invested in STI
Principal = 10,000 SGD
Period = 120 months
Annual interest rate = 9.2%
Total return = 24,111 SGD
That is stark difference in returns. Obviously there is a lot of simplification here with regards to the calculations and assumption of constant returns and average inflation numbers. But the point is pretty clear that the inflation and currency depreciation eat into your returns when investing in developing economies compared to developed economies even when the headline GDP growth might be very impressive in countries like India, Indonesia, China etc.
Also the example looks at a limited 10 year window for returns, but the outcomes could be drastically different for rolling returns over different time frames / start and end periods.
So what is the recommendation? Stick to developed markets only? Obviously not. A well diversified portfolio with adequate hedges are required to attract and maintain sustained returns.
Spread your investments across geographies as a hedge.
Be cognisant of country and currency risks.
Headline GDP growth might sound great on paper, but understand how that translates to returns on a constant currency basis
Do you have any thoughts on this topic? Leave your comments below.