Is Singapore’s Share Market Any Cheap Now?

At the start of each month, I like to take a look at the market’s valuation in order to have some insight on how I can approach bargain hunting.

For instance, if the market’s really cheap, then it may be favourable to invest in beaten-down shares with ugly businesses. That’s because their share prices would likely have decreased the most and hence have a higher upside over the shorter-term.

On the other hand, when the market’s pricey, then it might make more sense to invest in shares with quality businesses that can compound wealth over the long-term. That’s because even though these shares might be pricey over the short-term, they might be in a situation of “being short-term expensive, but long-term cheap.” Meanwhile, when the market’s pricey, shares with ugly businesses may be priced expensively as well. This makes investing in them dangerous because we’re now faced with two disadvantages: A lousy business which can’t compound wealth over the long-term; and an expensively-valued share price.

With October having just ended last Friday, let’s delve into the numbers.

The SPDR STI ETF (SGX: ES3) closed at S$3.31 last Friday. At that price, the exchange-traded fund, which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI), is valued at around 13.7 times its trailing earnings. This valuation figure compares very favourably against the index’s long-term average price/earnings (PE) ratio of 16.6.

From this angle, Singapore’s shares can be said to be cheap. But, given that the Straits Times Index is made up of only 30 shares and there are actually more than 750 listed entities here, the index’s valuation might not give us the full picture.

This is where another valuation measure comes into play – and it is one which I favour. This measure simply looks at the number of net-net shares which exist in the market currently. A net-net share is one which has a market capitalisation lower than its net current asset value (NCAV = total current assets minus total liabilities).

With net-net shares, investors are essentially getting a discount on current assets (like cash, short-term investments, inventories, and receivables) sans all obligations (like borrowings and trade payables). On top of that, investors in net-net shares are also getting long-term assets – like factories, properties, long-term bonds etc. – thrown in for free.

It’s thus easy to see how net-net shares can be potentially great bargains. And so, if they start appearing in large numbers in the market, it can be a sign that the market’s really cheap.

The chart below shows where we are at the moment:

Number of net-net shares in the market (31 October 2014)

Source: S&P Capital IQ

With 107 net-net shares currently, Singapore’s market is nowhere near being as expensive as it was back in the second half of 2007, when there were lesser than 50 net-net shares. At the same time, bargains were also not as widespread as they were in the first half of 2009 when close to 200 net-net shares appeared.

This corroborates well with the message that the Straits Times Index’s PE ratio is telling us. Currently, the market’s in a lukewarm kind of temperature – not too hot and not too cold.

In any case, it’s good to also point out that the market being reasonably valued now does not mean that it can’t crash or decline anytime in the near future. Although investing into shares at low or reasonable valuations gives us great odds of future success, it can afford no protection whatsoever against short-term price declines.

How cheap or expensive Singapore's share market is can be an important piece of news for you as an investor. But it's also not the only interesting and important development about our local market you should know about. To keep up to date with what's exactly happening in today's market, click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore can also show how you can GROW your wealth in the years ahead.

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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.