CFGB 6101

Economics for Managers

Semester 1, 2016/2017

Demand and Price Analysis on STI

STRAITS TIMES INDEX

Prepared by:
No
1
2
3
4
5

Name
Cui Pei Pei
Gloria Sharlini Anthonysamy
Kevin Ngui
Kanbinuer Aini
Koe Seng Yew

Matric No
CGA 150118
CGA 140011
CGA 160025
CGA 150086
CGA 150022

Submitted to:

Dr. Chan Sok Gee

21st Oct 2016

Contents
1. Introduction.................................................................................................2
0

1.1 What is stock index?..................................................................................2

1.2 Straits Times Index (STI)............................................................................2
1.3 Factors that determine the demand of stock market............................................2
1.3.1 GDP................................................................................................2
1.3.2 Inflation............................................................................................3
1.3.3 Unemployment rate.............................................................................4
1.3.4 Government Intervention.......................................................................4
2 Data Collection..............................................................................................6
2.1 Raw Data................................................................................................7
3. Data Analysis.............................................................................................10
3.1 Regression Analysis................................................................................10
4.0 Discussion...............................................................................................15
4.1 Regression data......................................................................................15
From the P value we can see that Unemployment Rate have the highest correlation which
is very unusual compare to other countries. GPD have the least correlation among the three
as it has the highest P value (0.11). However GPD contribute to the Multiple R value and R
square value in the correlation with the STI price.................................................15
4.2 Straight Time Index (STI) Vs Gross Domestic Product (GDP)............................16
4.3 Straight Time Index (STI) Vs Consumer Price Index (CPI)................................18
4.4 Straight Time Index (STI) Vs Unemployment Rate..........................................20
5. Conclusion.................................................................................................21
6. References................................................................................................22

1. Introduction
Due to economy recession, many people tend to invest in stock market and expect a higher
return to cover the loss caused by inflation rate increment or interest rate decrement. But how
to analyze and forecast the stock market and make wise decision on stock market investment
is crucial for very investor or economical managers. Hence, the purpose of this report is to
answer aforementioned question by analyzing the demand and the price of the STI from year
2008 to year 2015 and also the factors that determine the demand of the stock market.
1.1 What is stock index?
A stock index is a measurement of the value of a section of the stock market. Stock index is
reckoned and obtained from the prices of certain selected stocks. Weighted average is
introduced for those stocks price in order to overcome the inconsistency problem during the
calculation period. Stock index is a useful tool for investors or economical managers to
understand, explain and forecast the market, furthermore, to compare the return on specific
investments.
1.2 Straits Times Index (STI)
The Straits Times Index (STI) is a capitalization-weighted stock market index that is regarded
as the benchmark index for the Singapore stock market. It has close collaboration with
Singapore Press Holdings (SPH), Singapore Exchange (SGX) and FTSE Group (FTSE). The
performance of the top 45 companies listed on the Singapore Exchange is being tracked by
STI.
1.3 Factors that determine the demand of stock market
1.3.1 GDP
GDP (Gross domestic product) is a monetary measure of the market value of all legal and
final goods and services produced in a given time period. While nominal GDP does not
reflect differences in the cost of living and the inflation rates of the countries. But in the
reality, values are adjusted due to inflation, thus real GDP is more accurate to measure a
countrys economic performance.
2

The behaviour of aggregate stock prices is a subject of enduring fascination to investors,

policymakers, and economists alike. A casual inspection of stock market prices and GDP in
developed market economies reveals that these tend to move together. Countries doing well
in terms of GDP performance tend to experience gains in domestic stock exchanges (Gevit
Duca 2007).
Theoretically, if GDP grow up, that means companies can manage to make profit during a
certain period. Therefore, the earnings per share for stakeholders will be increased. This good
phenomenon eventually attracts more people come to invest in the stock market, the demand
of stock market will increase accordingly, vice versa.
1.3.2 Inflation
In an economy, if general price level of goods and services keep increasing over a period of
time, we call this phenomenon as inflation. In contrary, it is deflation. If price level goes
up, the purchasing power of each unit of money will be reduced accordingly. In order to get
better understanding of how inflation relates to stock demand, we need to understand its
relationship with monetary policy and consumer price index (CPI).
Monetary policy is the process by which the monetary authority of a country controls
the supply of money. The purpose of monetary policy is to ensure price stability and generate
trust in the currency by targeting an inflation rate or interest rate.
A consumer price index (CPI) measures changes in the price level of a market
basket of consumer goods and services purchased by households. It is a factor that to
determine the inflation rate.
When CPI is high, means inflation rate is high, interest rate will be adjusted up to a higher
rate in order to attract people to save more in the bank which can get higher return, thus
eventually result in reduction of cash flow in the mark. Hence, the purchasing power for the
demands of goods and services will lower down, the price of goods and services will be in
control. Besides that, people also tend to save rather than spend. Less cash flow in the market
will reduce the stock demand accordingly.
In the US, high expected inflation has tended to coincide with periods of heightened
uncertainty about real economic growth and unusually high risk aversion, both of which
rationally raise equity yields. Some literatures suggest that countries with a high incidence of
3

stagflation should have relatively high correlations between bond yields and equity yields and
confirm that this is true in a panel of international data (Geert Bekaert, Eric Engstrom, 2008).
1.3.3 Unemployment rate
Unemployment rate is the percentage of total unemployed labor force, but they are willing to
work and looking for job. Unemployment rate is often used to measure the health of
economy, it is can be categorized as anticipated and unanticipated unemployment rate.
Some literatures particularly examine the nonlinearity in stock markets reaction to
unemployment rate and study the effect at each individual point of stock return distribution.
They find that only anticipated unemployment rate has a strong impact on stock prices. An
increase in the anticipated unemployment rate leads to an increase in the stock market price.
Thus, an increase in the anticipated unemployment rate is in general good news for stock
prices. High unemployment rate is followed by monetary policy action of Federal Reserve
(Fed). When unemployment rate is high, the Fed decreases the interest rate, which in turn
increases the stock market prices (Jesus Gonzalo, Abderrahim Taamouti, 2014).
1.3.4 Government Intervention
Stock market always reflects a countrys economic conditions. When a country is facing
market inefficiency or market failure, government intervention will take place. The purpose
of the government intervention is to promote general economic fairness, maximize social
welfare. The government will try to combat market inequities through regulation, taxation
and subsidies.
What types of capital market interventions governments should undertake? Are there any
interventions for which the benefits exceed the costs? Some research works have shown that
sometimes quantity-based interventions (administrative restrictions and controls) can reduce
risk more effectively than price-based interventions (taxes and subsidies). In addition to direct
forms of interventions, such as taxes and restrictions on inflows and outflows, interventions
in capital markets can also take on a variety of indirect forms such as limiting banks shortterm foreign borrowing or applying adverse tax or bankruptcy treatment to foreigndenominated borrowing. Though the regulations vary in their methods, they generally serve
to segment the domestic and foreign exchange markets.

Singapore have achieved comparable economic successes through different development

strategies.
After World War II, Singapore government adopted an interventionist approach to develop its
economy. But, entering the 1980s, a distorted economy caused by over-regulation forced the
Singapore government encouraged industrial diversification, from manufacturing into
financial and professional services, in order to develop the city into a total business centre.
Singapore entered a brief period of recession in the first half of the 1980s as a result of high
wages caused by over-regulation, high company tax rate, rising statutory charges, and a high
CPF contribution rate. The government responded to the economic downturn by recognizing
certain adverse effects of excessive intervention and by introducing a number of corrective
measures in 1986. Since then, the government has adopted a number of policies to reduce its
direct involvement in the economy and has switched to a new emphasis of managing the
economy through partnership with business and labor. The Government of Singapore
Investment Corporation (GIC), formed in 1981, invested heavily in the private sector. These
changes contributed to productivity increases and a 30% drop in production costs. By 1988,
the economy rebounded and, entering the 1990s, Singapore has been aiming to surpass Hong
Kong as an international centre of finance and business headquarters. Further to the above
changes, the government de-emphasized using deficit spending to stimulate economic
growth. Since 1986, budget formulation has to include a 5-year expenditure and revenue
forecast, with the purpose of producing an overall balanced budget for each block of a 5-year
planning period. Budget surplus was subsequently produced for each of the years between
1986 and 1997.
Singapore government chose not to defend its money and stock markets during the
speculative attacks. As indicated by Lee Hsien Loong, Deputy Prime Minister of Singapore,
Singapore will continue to allow free capital flows, encourage foreign investments, and plug
itself into the mainstream of the global economy.

2 Data Collection
All the data are source from Bloomberg, Yahoo! Finance and Singapore official website as
our reference. Our time range of our data analysis are from 2008 to 2015, and we choose
quarterly of the year to analysis to be more specify on our data analysis. The reason we
choose after 2008 is due to the Blumberg terminal limitation of showing 40 latest data. This
in a way limited our range of data however we are still able to do a regression analysis with
32 data. The time series quarterly data is collected at the end of the quarter.
At the start we have five factor which includes dividend payout and deficit of budget
per GDP but after doing the regression analysis we found that the P value is higher that the 3
factor we chosen. Thus we decided to focus on the 3 factor only.
For government intervention there is the quantified data available however as we did
our analysis on the data of our factors we found that there are signs of successful government
intervention as the STI price seems to be not correlated in certain time period.

2.1 Raw Data

Date
STI Price
CPI
31/12/15
2882.73
30/9/15
2790.89
30/6/15
3317.33
31/3/15
3447.01
31/12/14
3365.15
30/9/14
3276.74
30/6/14
3255.67
31/3/14
3188.63
31/12/13
3167.43
30/9/13
3167.87
28/6/13
3150.44
29/3/13
3308.11
31/12/12
3167.08
28/9/12
3060.34
29/6/12
2878.45
30/3/12
3010.46
30/12/11
2646.35
30/9/11
2675.16
30/6/11
3120.44
31/3/11
3105.85
31/12/10
3190.04
30/9/10
3097.63
30/6/10
2835.51
31/3/10
2887.47
31/12/09
2897.62
30/9/09
2672.57
30/6/09
2333.15
31/3/09
1699.99
31/12/08
1761.56
30/9/08
2358.91
30/6/08
2947.54
31/3/08
3007.37

GDP
-0.6
-0.6
-0.3
-0.3
-0.1
0.7
1.9
1.2
1.5
1.6
1.8
3.5
4.3
4.7
5.3
5.3
5.5
5.5
5.2
5
4.6
3.7
2.7
1.6
-0.5
-0.4
0
2.6
5.4
6.8
7.5
6.7

6.2
2.3
-1.6
0.2
6.9
2
1.5
1.4
7.6
0.3
9.1
5.4
8
-5
2.6
9.4
1
3.3
-0.9
14.4
11.6
-8.4
23
37
-1.7
18.9
19.2
-9.7
-13.5
-0.5
-12
15.8

Unemploym
ent
2.9
2.9
2.8
2.6
2.7
2.7
2.8
2.9
2.7
2.6
2.9
2.8
2.7
2.8
2.8
2.9
2.9
2.9
2.9
2.8
3.1
3.1
3.1
3.2
3.3
4.9
4.5
4.6
3.9
3.4
3
2.7

In order to make it simplify, the data we collected plotted into graph, following below: -

Figure 4.0 Singapore STI Index

Figure 4.2 Singapore GDP Rate

Figure 4.3 Singapore CPI Rate

Figure 4.4 Singapore Unemployment Rate

3. Data Analysis
3.1 Regression Analysis
For Regression analysis we use multiple regression so that we can check how much
correlation are the 3 data in total with the movement of the STI prices. This is due to a special
function in regression analysis that able to make 2 of the 3 factor constant to check for the
correlation of individual data and in combination.

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11

12

4.0 Discussion
4.1 Regression data
Multiple R is 0.84 shows that the combination of 3 data is highly correlated as our data
explains 84% of the variance in the dependent variable. R square value is 0.7, this shows that
our data explained 70% of the variability of the response data around its mean. The adjusted
R square is 0.67 and show that our data explain 67% of the variability. Although the standard
13

error seems high (237.12) but it is just around 10% of the STI average price. We have 32
observations which is sufficient large amount of data enough to do an unbiased regression
analysis.
p-value for each term tests the null hypothesis that the coefficient is equal to zero (no
effect). A low p-value (< 0.05) indicates that we can reject the null hypothesis. In our
regression we found that CPI (0.01) and Unemployment Rate (1.98E-08) meet that criteria
but GDP (0.11) doesnt meet. This shows that CPI and Unemployment is highly correlated to
the movement of STI prices while GDP doesnt have a close correlation.
From the P value we can see that Unemployment Rate have the highest correlation
which is very unusual compare to other countries. GPD have the least correlation
among the three as it has the highest P value (0.11). However GPD contribute to the
Multiple R value and R square value in the correlation with the STI price.

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4.2 Straight Time Index (STI) Vs Gross Domestic Product (GDP)

GDP in the country is very important because its contain the most comprehensive details
about the overall health of the economy. When consumer make major purchases or spending
money such as property or automotive, which leads into increased of sales and earnings for
company, and further increasing the GDP, however in the other way round, the lower the
GDP, STI will affected as well. According to BBC news in 2011, mention that Singapore has
grew by 14.7% in 2010 which break the historys record of Singapore. Although during that
year USA facing downturn and other developed economies collapsed however Asia countrys
economic still remain healthy. During that year has shown strong growth momentum from
Singapore, which mainly from three strong pillar industries which are manufacturing,
financial services, and tourism. Furthermore, in 2010 Singapore just went into the casino
industry which revive economic growth of Singapore which also one of the reason GDP of
that year grew higher.
According to scholar Nathan Taulbee (2001) mention that because of the consumer
purchasing power would devote more income toward stock market therefore an increase of
GDP from one period to the next should also increase the level of the stock market, further
comparing on the figure 4.0 Straight Time Index and figure 4.2 GDP Singapore, which more
likely applicable especially during the year 2008 to 2010.
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From the Graph of STI and GPD vs Date we can see that before the STI price drop to
the lowest point in December 2008, the GPD growth rate was already hitting the lowest point
in June 2008 and again in December 2008 of more that negative 10%. That was a huge
economic crisis in the end of 2008 so if investors had took notice of the huge drop in GDP
growth rates they would have been able to pull out their money from the capital market. In
June 2009 both the GPD growth rates and STI price recover together so from the huge
percentage of GPD growth rates we can be confident that the Singapore capital market had
recovered from the 2008 economic crisis. In September 2011 there is a big drop in STI price
but GDP growth rate already show a drop June 2011 in advance and drop again together in
December 2011 together with the STI price.
In September 2012 there is a big drop in the GDP growth rates but the STI price is not
affected. This suggest that perhaps the Singapore government had taken some action to
intervene. The Government intervention is successful as the STI price is maintained for 2
years after that.
In September 2015 before the STI took a huge drop of around 1000SGD the GDP
growth rate already show a drop in March 2015 and a negative growth in June 2015. This
shows that GPD growth rate is a good indicator of the movement in the STI price.

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4.3 Straight Time Index (STI) Vs Consumer Price Index (CPI)

Consumer Price Index (CPI) is the main measure for inflation and affect the stock market
either positively or negatively. Talla (2013), explains that expected and unexpected inflation
determines the direction and relationship between stock market and inflation. According to
economist, inflation and growth are weighted down by almost similar factor such as weak
global demand. Furthermore, the downside risk of inflation may be a mirror image of such
risk growth in a country. When firm tend to increase their prices demand exceeds supply and
this makes their earning to increase that resulting to increase in dividends and firm stock and
stock value. As for unexpected inflation, an increase in general price lead to increase in cost
of living when force people to invest less and relocate resources. When inflation is high
nominal interest rate is higher and this will lead to reduction in present value of the income
generated by firm as discounted rate to determine the intrinsic value of the stock went up and
will make stock price to decrease.
According to figure 4.3 Singapore CPI rate show a drastic fall from the year 2008 to
2009 due to global financial crisis in the year 2008 that causes lack in consumer demand and
price cutting in business and also causes employment strike that lead to recession. The figure
has increased slightly to positive from the year 2013-2014 and fall sharply to negative in the
year 2015. These decline of 0.5% is caused by a fall in housing and transport cost due to
17

stronger pick up in the cost of petrol and overall price of selling forecasted by Reuters
economists and expected to slower and continue to be positive in the year 2016.
The CPI rate was at its peak at June 2008 while the STI price maintain it price. After
that the STI price dropping in September 2008 while CPI also drop but the magnitude is not
as much as the drop in STI price. After STI price drop to a low in March 2009, the CPI rate
still continue to drop until December 2009 although by December 2009 STI price had
recovered from the economic crisis to a healthy range of almost 3000SGD. This suggest CPI
is a lagging indicator to the movement of price in STI as CPI rate only show the recovery
after December 2009 when STI price had start to recover since March 2009.
Since June 2012 the CPI rate and the STI price seems to be not in correlation as the
CPI rate keep dropping while STI price are increasing. This suggested that there was
government intervention in 2012 or before that to protect the Singapore stock market which
resulted in the maintaining of STI price.

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4.4 Straight Time Index (STI) Vs Unemployment Rate

There is an ongoing debate regarding about unemployment rate whether affected stock
market increase or decline. The unemployment rate usually rises during business recessions
and falls during business expansions; and many economists, e.g., Lilien (1982) Loungani,
Rush, and Tave (1990) suggest that stock market dispersion is a good proxy for the volume of
intersectional shifts. Intuitively, because stock prices are equal to expected discounted future
cash flows, when stock prices in a sector go up (down), the sector is likely to experience
increased (decreased) cash flows and thus demand more (less) labor input in the future.
Consistent with Liliens (1982) conjecture, Loungani, Rush, and Tave document a
significantly positive relation between stock market dispersion and the future unemployment
rate. However according to our analysis, the higher unemployment, negative affected on the
stock market. The more person losing their job, which mean the lesser tax that country will
receive. When a country facing a debt crisis, the whole financial system include bank might
be facing financially unstable and downturn the value of the stock market.
According to figure 4.4 unemployment rate among 2008 to 2015, the highest rate was
in year sep-2008 sep.2009 which between 3.4 to 4.9, in the same year of STI in Singapore
(Figure 4.0) reached the lowest point which is 1699.99 among 2008 to 2015 as well, in the
another hand Singapore lowest unemployment rate was 2.6 in year Mar 2015 and this time
19

period STI in Singapore was reached highest point which is 3447.01 as well. Base on
previous researcher study our statement above are proven.
So from the graph above we can see that the unemployment rate is inversely related
with the STI price. In March 2009 when STI price hit a low the unemployment rate hit a high.
However the unemployment rate seems to lag behind the movement of the STI price as STI
price encounter a big drop from June 2008 to December 2008 but the Unemployment rate
continue to rise till it hit a high in March 2009 and September 2009. In December 2009
unemployment drop to a low while STI price inversely rise to a high. After that the
unemployment rate drop consistently before hovering around below 3%.
There is a big drop in STI price in September 2011 until December 2011 before
recovering in March 2012 however there is no big change in the unemployment rate in 2011
and 2012. This suggest there is successful government intervention in 2011 that keep the
employment rate in Singapore.
Singapore is a nation without natural resources, so it is highly dependent on its human
resource. This is shown in the P value in regression with is 1.98E-08 which is super low and
shows the super high correlation of Unemployment with the STI prices. When there is high
unemployment Singapore would have less working adults to contribute to the nation so the
economy is affected and the STI price drop as well.

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4.5 Government Intervention

In this report we are not able to quantify and measure the government intervention in 2011 or
2012 which keep the STI price strong and unemployment rate in a low range. Thus we can
only search for information on Singapore government announcement in 2011 and 2012 for
the government intervention done.
After some checking with Singapore government sources we found out that Singapore
been aggressively controlling the monetary policy after graph below. From the graph we can
see the Monetary Authority of Singapore (MAS) tightening the exchange rate in 2010 and
2011 which influence the export and import of the country. As Singapore is an net import
country, this influence the performance of the business in Singapore which in turn affected
the STI price.

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22

5. Conclusion
All the three factors used in these analysis consist of gross domestic product (GDP),
consumer price index (CPI) and unemployment rate are interrelated and enhanced to a
country economic development. These factors are the most important element to a country
economy and without this factors a country wouldnt be developed and has a relationship
between economy, monetary and fiscal policy of a country. These factors also determine to a
country healthy financial system and evaluate on their performances. Apart from that help a
country to prevent from a disaster such as recession.
From the regression analysis we can confirm that consumer price index (CPI) and
Unemployment Rate are highly correlated with the stock price of STI. From the GDPs P
value which is more than 0.05 (0.11), we deduce that Gross Domestic Product (GDP) is not
highly relational to the STI price. In combination these three factors gross domestic product
(GDP), consumer price index (CPI) and unemployment rate are highly correlated with the
STI price with a very high Multiple R value of 0.84 and a R square value of 0.7.
From the total Multiple R value of 0.84, we can see that there are other complex
factors that are correlational with the STI stock price however in this report we just focus on
the 3 main important factors that we found have the highest correlation with the STI stock
price. Another big factor is the government intervention, Singapore utilize its monetary policy
wisely in 2010 and 2011 which resulted in a stable economy in 2011 and 2012 when other
countries are facing economics problems in that 2 years.
Based on our result it is an additional indicator for investors and the Singapore
government to keep an eye on these 3 factor to monitor the STI stock market. The Singapore
government can refer to these 3 factors to decide on its government intervention as seen what
it successful did through controlling the monetary policy. We thinks government intervention
play a role to protect the country economics to protect its business and employments. Our
report also helps people to understand the fundamental movements in the STI stock market as
all technical indicators cannot substitute the fundamental foundation of a capital market.

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6. References
i.

Gevit Duca, (2007). The relationship between the stock market and the economy:

ii.

experience from international financial markets, Bank of Valletta Review, No.36.

Geert Bekaert, Eric Engstrom, (2008). Inflation and the stock market: understanding the

iii.

Fed Model, JEL Classifications, G12, G15, E44.

Jesus Gonzalo, Abderrahim Taamouti, (2014). The reaction of stock market returns to
anticipated unemployment, Journal of Economic Literature classification: C14, C58,

iv.

E44, G12.
Nathan Taulbee (2001). Influence on the Stock Market. The Park Place Economist Vol 9,

v.

pp91 100
Mahmood Ramadan Barakat (2016),International Journal of Economics and Finance, Vol

vi.

8,No 1, page195
Investopedia (2016). Do rising unemployment rates tend to increase or decrease investor
sentiment and consumer confidence? [online] available at:
http://www.investopedia.com/ask/answers/060115/do-rising-unemployment-rates-tendincrease-or-decrease-investor-sentiment-and-consumer-confidence.asp [Accessed 01 Oct

vii.

2016]
The economic performance index (EPI): an intuitive indicator for assessing a countrys

viii.

economic performance dynamics in an historical perspective

Trading Economics (2016). Singapore GDP [online] available at:

ix.

http://www.tradingeconomics.com/singapore/gdp [Accessed 01 Oct 2016]

Trading Economics (2016). Singapore Inflation [online] available at
http://www.tradingeconomics.com/singapore/inflation-cpi/forecast [Accessed 01 Oct

x.

2016]
Trading Economics (2016). Singapore Inflation CPI [online] available at

xi.

http://www.tradingeconomics.com/singapore/inflation-cpi [Accessed 01 Oct 2016]

Boundless.com (2016). Why Government intervention in Markets [online] available at:
https://www.boundless.com/economics/textbooks/boundless-economicstextbook/introducing-supply-and-demand-3/government-intervention-and-disequilibrium-

xii.

49/why-governments-intervene-in-markets-182-12280/[Accessed 01 Oct 2016]

Monetary Authority of Singapore Annual Report 2011/2012 [online] available at:
http://www.mas.gov.sg/annual_reports/annual20112012/work02_01.html [Accessed 01
Oct 2016]

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