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Is the Stock Market Giving Out Chinese New Year “Hong Baos” In Advance?

As of the time of writing at 1 pm today, the Straits Times Index (SGX: ^STI) is down some 1.3% to 3,038 points. This represents a 4.1% decline from the index’s closing level of 3,167 points at the end of Dec 2013.

As of 31 Dec 2013, the following five companies carried the lowest price-to-earnings ratio: real estate outfit Hongkong Land Holdings (SGX: H78); commodities trader Olam International (SGX: O32); South-East Asia’s largest bank DBS Group Holdings (SGX: D05); property developer, and infrastructure and marine engineering firm Keppel Corporation (SGX: BN4); and United Overseas Bank (SGX: U11).

Company Price: 31 Dec 2013 PE Ratio: 31 Dec 2013
Hongkong Land US$5.90 9.8
Olam S$1.535 10.1
DBS S$17.10 10.7
Keppel Corp S$11.20 11.0
UOB S$21.24 11.4

Source: S&P Capital IQ

After the index’s 4.1% decline, here’s how those five shares look like now:

Company Price: 27 Jan 2014 PE Ratio: 27 Jan 2014
Hongkong Land US$6.04 10.2
Olam S$1.44 9.6
DBS S$16.50 10.4
Keppel Corp S$10.53 10.5
UOB S$20.12 10.9

Source: S&P Capital IQ

With the exception of Hongkong Land, we can see that the rest of the five have become a tad cheaper compared to a month ago.

To do well in the stock market over the long-term, investors need do only two things: 1) Buy shares that are selling for legitimately cheap market prices in relation to underlying business fundamentals; and 2) Hold them for the long-term (measured in increments of ‘years’ rather than ‘months’ or ‘weeks’) to wait for market prices to reflect the share’s true underlying value.

So, the question now becomes, are those five shares legitimately cheap with their low price-earnings ratios, or are their depressed PE ratios a sign of uglier things to come?

If, as an investor, you believe that the five shares above would likely do well in their businesses going forward, then there’s a good chance that the upcoming Chinese New Year has delivered advanced “Hong Baos” to you (red packets containing money that are traditionally given by elders to the younger generation as a form of blessing).

And if you do think so, then you’re in good company as Hugh Young of Aberdeen Asset Management, one of Asia’s best fund managers, thinks that Keppel Corp, DBS, and UOB are among some of the best long-term bets investors can make in Singapore’s stock market.

On the other hand, those shares can turn out to be value traps if their subsequent corporate performance over the long-run turns out to be disappointing. So, they aren’t necessarily shoo-ins as true bargains even though they could serve as a useful springboard for further research.

All told, getting reliable and steady “Hong Baos” in the stock market depends upon our own judgement and patience and that’s something to bear in mind.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.