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Is Singapore’s Stock Market Cheap or Expensive Now?

I’ve a habit of looking at how cheap or expensive Singapore’s stock market is at the start of every month. I do so because it can give me insight on how I can approach bargain hunting. With February 2015 having just started, let’s get going.

Insights on bargain hunting

When the market’s really cheap, investors may want to focus on dirt-cheap shares with ugly businesses because they might be the ones with the largest gap between price and value for investors to exploit. Shares with strong business fundamentals may not fall as hard even when times are tough.

In another scenario when the market’s actually pricey on the whole, a focus on quality businesses that can compound wealth over the long-term might make sense. That’s because over a period of many years, quality businesses have the ability to grow into their elevated valuations, and then some.

Meanwhile, shares with poor underlying business economics in an expensive market tend to present investors with two disadvantages: (1) a business that cannot compound wealth over the long-term; and (2) an expensive share price.

A glance at valuations

Looking at the current price-to-earnings (PE) ratio of the market is a simple way to approach the question of “Are shares cheap or expensive?”

The SPDR STI ETF (SGX: ES3) – an exchange-traded fund which mimics the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – carries a trailing PE ratio of around 13.7 now.

This compares somewhat favourably with the Straits Times Index’s long-term average PE ratio; according to Reuters, the Straits Times Index’s average PE had been 16.6 over a 20-year period from 1993 to 2012.

Really stringent bargain hunters might be disappointed at the SPDR STI ETF’s current valuation though – the Straits Times Index was valued at only 6 times earnings or thereabouts at the start of 2009 during the financial crisis. So, despite the SPDR STI ETF carrying a PE now that’s lower than the long-term average for the Straits Times Index, it’s certainly not anywhere close to dirt-cheap territory.

Looking at valuations through a different lens

Another valuation measure I like to observe with the overall market is the number of net-net shares which exist currently. A net-net share is simply a share that has a market capitalisation lower than its net-current asset value (total current assets minus total liabilities).

Given that investors in a net-net share are getting a discount on its current assets sans all liabilities (and with long-term assets such as properties and factory equipment thrown in for free), it should be obvious to see that net-net shares are extremely cheap.

It thus stands to reason that the market on the whole would likely be cheap if net-net shares start appearing in large quantities.

Keeping these in mind, here’s where Singapore’s market is now (click for larger image):

Net-net shares in Singapore (end of January 2015)

Source: S&P Capital IQ

As of 31 January 2015, there were 104 net-net shares in Singapore’s stock market. A comparison of this figure with how the number of net-nets have evolved over the years since 2005 makes me think that the stock market here isn’t too hot, nor is it too cold.

In other words, shares in Singapore now are not too expensive (104 net-net shares versus less than 50 in the second half of 2007) but have yet to reach sure-fire bargain territory (the first half of 2009 had close to 200 net-net shares appearing). This is more or less the same thing the SPDR STI ETF’s PE ratio is telling us.

A Fool’s take

This quick take on how cheap or expensive Singapore’s stock market is can be useful for many things. But it’s very important to bear in mind that it cannot tell us what the market will do over the short-term.

Cheap shares can continue falling in price over the short-term, just as pricey shares can become even more expensive. As such, a study of the market’s valuation shouldn’t be used as a market-timing tool.

If you're interested in more investing analyses and the latest news about Singapore's stock market, you can get both from The Motley Fool's free investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore can help you grow your wealth in the years ahead. So, come sign up here.

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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.