Singapore STI versus M3 money supply

As a contrarian investor, I was wondering, how much of the recent stock market run-up could be due to M3 money supply growth. So I took the historical price data for the Straits Times Index from Yahoo, and compared it to the M3 money supply figures from MAS.

Due to the differing scales involved (M3 in terms of hundreds of billions of dollers, STI being a computed index from 2000 to 3000-odd), I re-calculated the figures to start from 0% for the first data point and based the rest of the series on that first data point. The X-axis is consistent, it's month-by-month from May 2005 onwards.

Here is the chart :

For the 2-year period from May 2005 to May 2007, in nominal terms, the STI went up by a very respectable 62%. But if you take the STI and divide by M3, you get a still not too bad, but slightly less awe-inspiring 18% growth (over 2 years). That is more or less in line with recent GDP growth figures of say, around 7-8% per year.

So, in (contrarian) reality, the Straits Times Index did not at all "outperform" or do any such thing over the past 2 years. It merely reflected the growth of the overall economy. Which does makes sense, in a way.

You can also look at the chart in another way. If you had put money in the overall STI, you would have beaten M3 inflation by 18% and done quite well (though slightly less well than you might have thought, if you had been thinking in nominal terms). But if you had put your money in ordinary bank savings accounts in May 2005, your money would have been clinging to the horizontal axis (at 0.25-0.35% per year), while M3 has gone up by some 37%. That's quite a substantial opportunity loss, don't you think?

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