Here’s a question: How do you determine how cheap our share market in Singapore is at any one point in time? I’m guessing that such a question would elicit as many responses as there are investors. But, I recently chanced upon an old October 2008 The Business Times article by Teh Hooi Ling that gave a really interesting way to look at how cheap or expensive the share market can be. Teh’s now Head of Research at the investing firm Aggregate Asset Management but prior to her current stint, she was a prominent, outstanding, and widely-followed financial journalist….
Here’s a question: How do you determine how cheap our share market in Singapore is at any one point in time? I’m guessing that such a question would elicit as many responses as there are investors. But, I recently chanced upon an old October 2008 The Business Times article by Teh Hooi Ling that gave a really interesting way to look at how cheap or expensive the share market can be.
Teh’s now Head of Research at the investing firm Aggregate Asset Management but prior to her current stint, she was a prominent, outstanding, and widely-followed financial journalist.
In any case, her article titled “The Great Singapore Stock Sale” mentioned there were about 100 Singapore-listed shares that were trading below their net current asset values (NCAV) at that time. By way of comparison, there are less than 800 shares in Singapore’s share market currently, so having 100 names become NCAV bargains showed how cheap the market had become at that point in time. On hindsight, that wouldn’t be too surprising either given that October 2008 was smack in the middle of the Great Financial Crisis of 2007-09.
For a slight historical detour, the NCAV screening method harkens back to the investing great Benjamin Graham. One of Graham’s chief techniques when he was running his own hedge fund back in the 1930s to 1950s was to look for shares that were selling below their net current asset values as these shares were – generally speaking – priced at irrational lows. In terms of mathematics, they were shares that exhibited the relationship in the table immediately below and it’s irrational because such companies were worth more dead than alive.
|Market Capitalisation < (Total current assets minus total liabilities)*|
|*Teh’s NCAV calculation saw her subtracting total liabilities and minority interests from a share’s total current assets|
Circling back to Teh and her article, her mention of how cheap Singapore’s share market became due to the widespread appearance of NCAV bargains led me to become intrigued by the following: How has Singapore’s share market evolved in terms of the number of NCAV bargains that appeared in the years both before and after the Great Financial Crisis? After working through the screens and spreadsheets, this is what I found:
The chart above is fascinating and I have some interesting insights about it but that’s another story for another day. What I want to point out now is how the number of NCAV bargains fell to a low of 44 in the fourth quarter of 2007, near the period when the Straits Times Index (SGX: ^STI) closed at a peak of 3,876 points on 11 October 2007. The number of shares selling below their NCAVs then subsequently climbed to a high of 191 in the second quarter of 2009, just after the Straits Times Index bottomed out at 1,457 points on 9 March 2009, its lowest point during the crisis.
Today, the number of NCAV bargains in Singapore’s share market is at 92. Using the number of NCAV bargains as a guiding criterion, although we’re certainly nowhere near the bargain territory Singapore’s market found itself in during the first half of 2009, shares in general are currently not close to being as expensive as it was near the pre-crisis peak.
Such information shouldn’t be used for timing the market – because no one can – but at the very least, it gives us a sense of where the market is at and how tough it may or may not be to find individual bargains.
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