Does the Recent Drop in the STI Represent a Good Buying Oppourtunity?

In recent weeks, the STI has lost almost 5% of market capitalization of its constituent stocks. Does this drop represent a good buying opportunity for investors? The current P/E ratio of the STI as a whole is 13.39 and the distribution yield is 3.05% (numbers from SPDR STI ETF page, the distribution yield was derived from the fund distribution yield plus the net expense ratio of the fund).

(STI- chart from Yahoo! Finance)

Looking back at the recent past, in October 2014, the STI has also decreased by around 5% as well and has been able to recover from that drop and increase back to its original levels within the same month. 

The recent drop in the bank shares which make up more than 30% of the STI, especially DBS and UOB on news of soft economic data from the US which would affect the increase in the interest by the Fed.

(UOB- chart from Yahoo! Finance)

However, I think that banks won't be affected by this to a great extent as the increase in interest rates would also result in an increase in their financing costs, so their net profit would be similar. Though they may be able to earn a higher return on internal funds, their own internal funds in the form of equity is usually only a fraction of their total assets. For example, UOB has $306.7 billion in assets and $29.8 billion in equity (according to annual report 2014), their equity makes up less than 10% of the assets that it has, hence I do not think that an increase in the interest income from its own internal funds would actually make a significant difference in in profits.

The decrease in the price of the bank shares does not seem justified to me based on the main reason I have identified for their decline and my thoughts on it. The low teens P/E ratio of the STI at its current value of 3298 appears attractive as well.

Just a final thought: While investing in individual bank shares seem to be the road to higher returns, I would prefer to invest in an STI ETF as it would provide the diversification needed should the bank shares not perform as expected, as they are usually more volatile and susceptible to the economic climate.

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