The Mirror Image of the Straits Times Index?

Recently, we keep hearing of the Chinese stock markets leading the movements in worldwide stocks. How true is this for the Straits Times index (STI) in Singapore? CashBench investigates…

 

[Photo: Koalazymonkey]

Before the current worldwide downturn, investors in Singapore typically look at the performance of the overnight markets in the United States for clues on how Singapore stocks will perform the following day. Does this work anymore?

Based on a 3-month and 12-month analysis carried out by CashBench, investors should start looking elsewhere for ideas. Over the past 3 months, there is a low correlation between the returns of the STI and the Dow Jones, Nasdaq or S&P 500 indices. This is true whether a comparison is made for same-day performance (E.g. Friday vs. Friday) or overnight performance (E.g. Friday in Asia, Thursday in US). Mathematically, the correlation between Singapore and the US indices over a 3-month or 12-month period range from 0.28 to 0.37.  These numbers are really far away from a “perfect” correlation score of 1.

… the Hang Seng index in Hong Kong is almost a mirror image of the Straits Times index.

If that’s the case, which markets now moves in step with the Singapore stock market? This may or may not surprise you, but the Hang Seng index in Hong Kong is almost a mirror image of the Straits Times Index. Over a 3-month or 12-month period, the correlation between the Singapore and Hong Kong stock market returns is about 0.78. This basically means that when the Hang Seng drops, the Straits Times is likely to follow, and vice versa.

However, depending on who you talk to, the Hong Kong stock market may or may not be representative of the entire “Chinese stock markets”. If we were to use the Shanghai Composite index for comparison instead, the correlation to Singapore’s Straits Times index drops quite a lot, down to 0.43 to 0.5.

CashBench ends with a surprising find. Despite being culturally and geographically close to Malaysia, the 12-month correlation between the Singapore STI index and Kuala Lumpur’s KL Composite index is just 0.37. However, over the past 3 months, this was much higher at 0.63. Will this short-term trend persists?

Note: The correlation analysis used by CashBench is based on the correlation co-efficient and can range from –1 to 1. A score of 1 indicates there is a perfect relationship between the two indices compared, where an upward movement in one index is followed exactly by an upward movement in the other index. A score of 0 means there is no relationship, and performance of both indices are completely random and does not follow any pattern or trend. Data analysed is based on adjusted closing index levels up to 17 Sep 2009 (Thursday).