We’re at the start of a new month and so it’s time for my monthly look at how cheap or expensive Singapore’s share market is. This exercise is useful because it helps give invsetors some perspective on how to hunt for bargains. For instance, if the share market’s really cheap, the focus might be on distressed and beaten-down shares with ugly businesses because they might have the largest gap between price and value for investors to exploit; shares with stronger business fundamentals might never see such wide gaps. On the other hand, if the market as a whole is pricey, then…
We’re at the start of a new month and so it’s time for my monthly look at how cheap or expensive Singapore’s share market is. This exercise is useful because it helps give invsetors some perspective on how to hunt for bargains.
For instance, if the share market’s really cheap, the focus might be on distressed and beaten-down shares with ugly businesses because they might have the largest gap between price and value for investors to exploit; shares with stronger business fundamentals might never see such wide gaps.
On the other hand, if the market as a whole is pricey, then investors might want to prefer shares with quality businesses that can compound wealth over the long-term. That’s because such shares are likely to be in a situation of being “short-term expensive but long-term cheap,” meaning to say that their businesses can grow into their high valuations and then some.
As for shares with poor business-economics, having a pricey overall-market would also mean that such shares are likely to be pricey. Investors are thus faced with two disadvantages: A business that cannot compound wealth over the long-term and an expensive share price.
Pricey or cheap from one angle
There are two measures I like to look at with regard to the market’s valuation. The first is straightforward and it is simply the price/earnings (PE) ratio of the SPDR STI ETF (SGX: ES3). The exchange-traded fund tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI), very closely; the SPDR STI ETF’s fundamentals can thus be used as a proxy for that of the Straits Times Index.
On that note, the SPDR STI ETF is valued at 13.6 times its trailing earnings as of its close last Friday. This compares with the Straits Times Index’s long-term average (from 1993 to 2012) PE ratio of around 17. From this perspective, Singapore’s shares can be said to have a very reasonable valuation. It must be noted though that we’re nowhere near dirt-cheap status yet given that the Straits Times Index had reached a PE of around 6 back at the start of 2009 during the Great Financial Crisis.
Pricey or cheap from another angle
The second valuation measure I like to look at deals with the number of net-net shares which are in the market currently. Net-net shares have market capitalisations lower than their net current asset values (total current assets minus total liabilities) – and that means such shares are extremely cheap. It thus stands to reason that when net-net shares appear en masse, the market’s likely to be really cheap as a whole.
With this as a backdrop, let’s look at where we stand at the moment (click for a larger image):
Source: S&P Capital IQ
As of 30 November 2014, there were 101 net-net shares in Singapore. This is nowhere near how expensive Singapore’s market had been in the latter half of 2007 when there was less than 50 net-net shares. We’re also currently not as cheap as it was back in the first half of 2009 when there were close to 200 net-net shares. As a brief reminder, 2007 and 2009 were all parts of the relatively recent Great Financial Crisis.
This again tells us that Singapore’s market is reasonably valued – perhaps even leaning towards ‘cheap’ – just like what the SPDR STI ETF’s valuation is saying.
A Fool’s take
Looking at how cheap or expensive the market is can be useful for many things. But crucially, it cannot tell us what the market might do next over the short-term. Cheap shares can become even cheaper before eventually rebounding, just as expensive shares can become even pricier in a roaring bull market before crashing. As such, this should never be used as a timing tool.
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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.