How Cheap Is Singapore’s Share Market Now?

We’ve just started a new month. For investors looking for new investing ideas or thinking of putting some money to work, it might be a good time to reflect on how cheap or expensive Singapore’s share market is right now.

This is done in the spirit of knowing where we stand at the moment. As investor Howard Marks once wrote in his book “The Most Important Thing”:

“We may never know where we’re going, but we’d better have a good idea where we are.”

Knowing where we stand now can give us meaningful insight into how we can approach our search for investing opportunities.

Determining cheapness

There are a number of ways of looking at where we are at the moment. One way is to look at the price to earnings (PE) ratio of a broad market index and compare it to some long-term historical average. In Singapore’s context, the Straits Times Index (SGX: ^STI) is the most widely-followed market index so let’s see what it can tell us.

The financial figures for the SPDR STI ETF (SGX: ES3) can be a good proxy for the STI given that its purpose is to track the market barometer. As of 31 August 2014, the STI was at 3,327 points with the STI ETF carrying a PE ratio of 14. In comparison, the long-term average PE ratio for the STI, stretching from 1993 to 2012, has been around 17.

But before you head out thinking valuations aren’t looking extreme by any means for Singapore’s share market, let’s check out another interesting and perhaps slightly more comprehensive way to gauge how cheap or expensive the market is.

The method in question is to look at the number of shares which are selling for less than their net current asset values (NCAV). Investors buying into shares with market capitalisations less than their NCAVs are in effect, getting a discount on current assets like cash, receivables, and inventories net of all obligations. To top that off, fixed assets like machinery, factories, and properties are also thrown in for free.

It’s easy to see how cheap such shares are and it thus makes sense that the market as a whole would be very cheaply-priced if such shares do appear en masse.

Where we stand now

The chart below, which stretches from 2005 till today, shows the change in the number of NCAV bargains that have appeared over the years.

Source: S&P Capital IQ

As of 31 August 2014, we have 93 shares selling below their NCAV, keeping in mind that there are slightly more than 750 shares listed in Singapore today. If we compare the figure with history, the simple conclusion is that the market’s nowhere near as expensive as it was in late 2007, nor is it anywhere near being as cheap as it was back in the first half of 2009.

To refresh your memory, the Straits Times Index had hit its low of 1,457 points on 9 March 2009 during the Great Financial Crisis. Back then, finding bargains was like shooting fish in a barrel, to borrow a quote from Warren Buffett. Today, investors might have to work with a stronger gun in an enclosed pond, though it should also be noted that we’re nowhere near having to spear for a tiny shrimp in an open ocean in current circumstances.

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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.