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Capturing recent market swings with a sector lens

Healthcare was the best-performing sector for 2015 while energy was the least performing

This year began with similar macro themes across Asia. Less global growth last year coincided with declines in global trade and manufacturing, particularly in China.

Market reactions overlaid with lower commodity prices and gains in the US dollar increased volatility across asset classes. Global policy responses have even led to a differential between the US Federal Reserve and European Central Bank, with the former recently raising interest rates on job growth, and the latter considering additional monetary stimulus.

This is why so many 2016 investment outlooks made references to uneven growth and policy differentials. In mid-January, the International Monetary Fund made a downward revision to global growth projections this year by 0.2 per cent to 3.4 per cent. Global growth is tentatively reported to have been 3.1 per cent last year.

GLOBAL GROWTH IMPACT

In the past, the region's highly trade-dependent and advanced economies, such as Singapore and Hong Kong, have been among the biggest responders to global growth revisions. This is particularly so when China had been a force in those revisions. There is a good economic reason for this.

Over the past five years, Singapore's quarterly gross domestic product averaged year-on-year growth of 3.5 per cent. This was exactly half the quarterly average GDP growth of the preceding five years, at 7 per cent.

This was associated with China averaging year-on-year GDP growth of 7.8 per cent over the past five years, against an 11.3 per cent average over the preceding five years.

In a similar way, over those 10 years, the lion's share of the Straits Times Index (STI) annualised 5.7 per cent total returns occurred over the first five-year period.

As volatility has picked up at home and across the region over January, the STI has remained the less volatile of Asia's two most open and advanced economies.

While the gains of the STI over the past 10 years were similar to those of the Hang Seng Index (HSI), the volatility of the Hong Kong index was as a quarter higher over the period. This meant the risk-adjusted returns over the 10-year period of the STI were one quarter higher than those of the HSI.

As volatility has picked up at home and across the region over January, the STI has remained the less volatile of Asia's two most open and advanced economies.

In recent months, the STI also offered comparatively higher valuations and yields - at the end of January the price-to-earnings ratio of the STI at 13.3 was more than a third higher than the HSI at 9.7, while the associated dividend yield of 4.2 per cent was one-tenth higher than the HSI at 3.9 per cent.

SUM OF THE PARTS AND THE INDIVIDUAL COMPONENTS

Beyond the numbers, like Singapore, the STI has significant elements of business diversity and international reach.

The banking, industrial and telecommunications sectors, in addition to the consumer and real estate sectors, each contribute at least one-eighth in index weights.

Furthermore, around half the revenue associated with the STI is reported from outside Singapore, and 40 per cent of listed firms on the Singapore Exchange (SGX) are overseas companies.

The sum of these parts has provided for a diversified and compelling past. The aforementioned 5.7 per cent annualised gains outperformed the Singapore dollar-adjusted average 3.8 per cent total return for the Dow Jones Industrial Average, HSI, S&P/ASX 200, Nikkei 225 and FTSE 100.

More recently, it has been the individual parts that have come into investor focus.

The aforementioned growth challenges coincided with different sectorial performances. The past three years saw STI total returns at a 3 per cent gain, 10 per cent gain and then a 12 per cent decline. But despite the 10 per cent gain of 2014, then 12 per cent decline of 2015, the difference between the best-performing sector of the month and least-performing sector of the month was 128 per cent for both 2014 and last year.

The 2015 monthly sector performance chart shows that the strongest sectors of the month returned 66 per cent, and the least strong sectors declined 62 per cent. This was on a total return and market capitalisation weighted basis.

Hence, amid the recent two years of STI gains then declines, the key sectors maintained a degree of performance differentiation, which shows there will always be bright spots within the entire market.

In fact, the best-performing sector for the whole of 2015 was healthcare. And amid lower commodity prices, the least-performing sector was energy.

The healthcare sector generated a market capitalisation weighted total return of 17 per cent last year, following a similar return in 2014.

This positive performance coincided with the SGX All Healthcare Index generating a 12 per cent total return in 2015. The weightings of the SGX All Healthcare Index components are capped at a maximum 10 per cent at each periodical rebalance, so that it is better diversified across a range of stocks.

This means that IHH Healthcare, Biosensors International Group, Parkway Life Real Estate Investment Trust, Raffles Medical Group, Haw Par Corp, First Real Estate Investment Trust and Tianjin Zhongxin Pharmaceutical Group maintain similar index weightings.

Global growth risks can change for the better or worse and, pending their nature, can have a different sectorial or industrial impact.

For instance, while the difference between the best-performing sector of the month and least-performing sector of the month for 2014 and 2015 was the same, sector rankings were different.

SGX StockFacts (www.sgx.com/ stockfacts) enables investors to easily access and assess the profile of each stock that makes up each of the Global Industry Classification Standard Sectors illustrated in the monthly sector performance chart.

  • The writer is market strategist at Singapore Exchange.
A version of this article appeared in the print edition of The Sunday Times on February 14, 2016, with the headline 'Capturing recent market swings with a sector lens'. Print Edition | Subscribe