Why a Dead and Lifeless Stock Market in Singapore Is a Great Thing

Just yesterday, The Straits Times had published an article titled “Remisers feel the chill as investors shun local market.” The writer, renowned local financial journalist Goh Eng Yeow, goes on to paint a picture of how Singapore’s stock market’s seeing falling interest from both local and foreign investors.

“Average daily stock market turnover for the first 10 months this year fell 29.8 per cent to $1.06 billion from the same period last year,” wrote Goh. He then added that the turnover “was also only 44 per cent of 2007’s daily average turnover of $2.39 billion.”

For remisers in Singapore, it has been a tough time with Goh describing the dealing room “as being quieter than a library.” But for investors (that includes me), I actually feel wonderful and optimistic that this is happening.

Here’s why. Shares become mispriced under two general scenarios: 1) When market participants are overly exuberant; and 2) when market participants become apathetic or downright depressed. In the former, shares of companies are typically priced much higher than what the quality and future of their businesses warrant and that’s a bad time to invest.

Meanwhile, in the latter situation – which seems to be where we are at the moment – chances are high that shares of companies become priced much lower than their intrinsic values (or at the very least, shares are priced much cheaper than in the first scenario). And that makes it a great time to invest.

Here’s an example from Goh’s article. He mentioned that local counters like CapitaLand Limited (SGX: C31) and Wilmar International Limited (SGX: F34) are now “trading at well below their record high prices.” CapitaLand had peaked in May 2007 at around S$8.50 and today, it’s at S$3.32. Meanwhile, Wilmar skimmed an all-time high of just above S$7.00 back in January 2010 and is now worth just S$3.25 per share; in fact, investors who bought Wilmar near the end of 2007 would also be sitting on losses now.

When local shares were all the rage back in 2007 – when “Singapore was literally the “Asian Gateway”… to foreign investors who were hungry for exposure to the region’s booming stock markets,” according to Goh – both CapitaLand and Wilmar carried much higher valuations than they do today, as seen from the chart below.

CapitaLand and Wilmar's valuations

Source: S&P Capital IQ

At CapitaLand’s highest price in 2007, it was actually valued at almost three times its book value. Today, the real estate juggernaut carries a price-to-book (PB) ratio of just 0.9. As for Wilmar, it carried a staggering price/earnings (PE) ratio of 45 at its highest price in 2007 (reached on 28 December that year); the commodities outfit has since seen its PE shrink to a more palatable 14.5.

For investors interested in both CapitaLand and Wilmar, their valuations today make them way more attractive buys than back in 2007, all else equal.

A Fool’s take

When our stock market attracted all kinds of attention some years ago, valuations here got pushed out of whack – and it was not just CapitaLand and Wilmar which suffered. The market in Singapore saw the number of cheap shares (as measured by the number of shares which have market capitalisations lower than their net current asset values) fall dramatically in the latter half of 2007 when the Straits Times Index (SGX: ^STI) reached its all-time high prior to the financial crisis.

If it takes apathy from market participants to create cheaper prices for local shares, which in turn create a more benign and attractive investing environment, then I for one – as an investor – would be rooting for more.

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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.