Indices have a tendency to amplify the Pareto Principle, better known as the 80/20 rule, where a handful of stocks have an outsized impact on an index’s gains. In Singapore’s case, the banks take up only three spots in the 30-member index but are responsible for more than 50% of the STI’s market weight. South Korea’s Kospi index comprises 200 constituents, but just two counters — Samsung Electronics and SK Hynix — have a combined market weight of over 50%.
The dominance of local banks or South Korea’s memory chip giants within their respective indices is no fault of their own. If anything, this is what is supposed to happen when an index is market-cap-weighted instead of price-weighted.
Having a world-beating company is what any country would pine for, but for investors, the threat of concentration risk looms large. S Nallakaruppan, president of The Society of Remisiers (Singapore), had the same idea when he told us in this week’s cover story that the STI is effectively a “leveraged proxy on Southeast Asian banking and dividends.”
A rising tide can certainly lift all boats, but hitching an index’s fortunes to a handful of companies means things can turn ugly really fast if those stalwarts falter. That is exactly what happened to the Kospi in recent weeks. The index fell back to around 7,000 points after reaching a peak of over 9,000 points when Samsung Electronics and SK Hynix saw dips in their stock prices.
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It doesn’t have to be this way. Indices look the way they do because of their methodologies. In its previous iterations, the STI was a lot more diverse in its representation. Even with the banks included, the STI once saw its roster include tech companies like Creative Technology as well as hospitality firms like Shangri-La and Hotel Properties.
The rise of local banks has been a more recent development. According to data from FTSE Russell, which has helped manage the STI since 2008, local banks only took up about a third of the STI’s market weight between 2008 and 2016. It only started trickling upwards from 2017, when it first passed the 40% mark in 2018 and the 50% mark in 2024.
While there is no need to cap the banks within the STI artificially, there is definitely room for Singapore to do some soul-searching. The fact that the STI’s reserve list has become more interesting than the STI itself suggests that an expanded roster, just like the 55-member version which ran from 1998 to 2007, could be worth a revisit. That said, there’s a limit to what cosmetic changes can offer.
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Ultimately, an index, as imperfect a barometer as it may be, does reflect what a country’s economy is tilted towards. In Singapore’s case, the dominance of banking can be seen as a vote of confidence in the city-state’s ambitions to become a financial hub. It can also be read as an indictment of the country’s ability to nurture local entrepreneurs.
That perhaps is the more inconvenient truth facing policymakers looking to reinvigorate our stock market. Value unlocking and investor engagement can only take the market so far. At the end of the day, every market and investor is looking to put money on one thing and one thing only: great businesses.
