The Straits Times Index will be relaunched next year with thirty stocks, but we think this will face lift will not hide its wrinkles, or lengthen its life span. Rather, it will hasten its demise. And that's a good thing. The Straits Times Index is at odds with the Singapore Exchange's tie-up with FTSE Group to develop new indices for our market which adhere to global standards (a move which is to be applauded). After all, an index is supposed to provide a benchmark. What's the point of having a benchmark which does not apply consistently across the globe? The sooner we let go of this relic, the better.

The new Straits Times Index reminds me a lot of the Dow Jones Industrial Average in the United States. It also consists of thirty stocks. But while it might be interesting to look at the so-called top stocks (we could debate the composition) it is of little use to investors. The S&P 500, which obviously takes many more stocks into account, is a far better barometer of the market.

Similarly, even when the Straits Times Index still had 48 or 50 stocks (in terms of the consistency, the STI was pretty useless to begin with) it represented only around 60% of the total market capitalisation of SGX-listed equities. We need an index that adheres to global standards, and is more inclusive of the market.

I would acknowledge a counter-example in the All Ordinaries Index in Australia. It has more shares than the S&P/ASX-200, but is no longer considered the benchmark. But again, the old index gave way to the new, in the same way I think the Straits Times Index's days are numbered. For many years until 2000 the All Ords was the benchmark everybody looked at, largely because there was nothing better around. When the Australian Stock Exchange sold its indexing business to Standard & Poor's, and the S&P/ASX index series was created, the All Ords was recognised for the dinosaur it was. Even though it was cut back to the top 500 stocks by market cap (and applying the other criteria which these large indexing companies apply, such as freefloat), the S&P/ASX-200 became the new benchmark. The extra 300 stocks the All Ordinaries Index covered made up such a small percentage of the market that the S&P/ASX-200 became considered as far more representative of the stocks that mattered. So, the index with fewer stocks became the benchmark of choice.

However, I don't think we will see the index with fewer stocks, that is, the Straits Times Index, to remain the benchmark in Singapore, in the same way that we don't consider the S&P/ASX-20 or the S&P/ASX-50 as the benchmark in Australia. Too few stocks, too unrepresentative in market cap terms of the entire market.

Therefore, I cannot see a logical reason to keep the Straits Times Index. In my view, the only reason why FTSE is persevering with the Straits Times Index is due to nostalgia, to provide a cross-over period until the new FTSE indices become more established, or because of SPH's continued involvement in the indexing business. None of them good enough reasons to keep it.

My prediction is the Straits Times Index will be relegated to a second mention on the evening news, just as the All Ordinaries now plays second fiddle to the S&P/ASX-200, and the Dow Jones Industrials Average is always only mentioned in conjunction with the S&P 500.

The new benchmark to watch is the FTSE ST All Share Index. With 98% of the market covered, it will be far more relevant to what's going on. And because "FTSE ST All Share Index" is such a mouthful, and continues with the free advertising for a newspaper, we're just going to call it the "Footsie-All Share Index" or the "All Share Index".


Mark Laudi

Labels: FTSE, market capitalisation, revamp, Singapore Exchange, Straits Times Index