Are Shares In Singapore Expensive Now?

I’ve a habit of looking at how expensive or cheap Singapore’s stock market is at the start of every month as that can give me insight on how I can approach investing. With us at the start of March 2015, let’s get going.

Insights to be gleaned on investing

When the market’s cheap, it may make sense to focus on beaten-down shares with ugly businesses because they can often be the ones with the largest gap between price and value for us to exploit; shares with strong business fundamentals may not fall as hard during market downturns.

On the flip side, when the market’s expensive, a focus on shares with quality businesses that can compound value over the long-term – let’s call them “compounders” – may be better. That’s because over a multi-year period, compounders have the ability to grow into their elevated valuations, and then some.

As for shares with poor business fundamentals in a pricey market, buying them may pose two disadvantages for investors: (1) a business that cannot compound value over the years; and (2) an expensive share price in relation to its business value.

What valuations are telling us

To get a handle on the state of the market at the moment, we could look at the current price-to-earnings (PE) ratio of the Straits Times Index (SGX: ^STI), Singapore’s market barometer.

And to that point, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which closely tracks the fundamentals of the Straits Times Index, has a trailing PE ratio of 14 at the moment. That’s a valuation which compares somewhat favourably with the Straits Times Index’s long-term average PE ratio (from 1993 to 2012) of 16.6.

It should be noted that while we’re nowhere near dirt-cheap currently (dirt cheap would probably look something like at the start of 2009, when the Straits Times Index was selling for merely six times its historical earnings), some solace can still be found in how valuations are clearly nowhere near out-of-whack on the high side.

Another figure I like to use as a gauge for how expensive or cheap the market is would be the number of net-net shares which are available now; a net-net share has a market capitalisation that is lower than its net current asset value (total current assets minus total liabilities).

Such shares are generally thought of as being great bargains (this does not mean that net-net shares are not risky – but that’s another topic for another day) because investors who buy into them are getting a discount on current assets (such as cash and inventory) net of all liabilities – on top of that, fixed assets like properties and factories are also thrown in free-of-charge.

It thus follows that the market would likely be cheap on the whole if net-net shares are available in great quantities. With that, here’s where we stand at the moment with Singapore’s market:

Net-net shares in Singapore (28 February 2015)

Source: S&P Capital IQ

As of 28 February 2015, there were 102 net-net shares in Singapore’s stock market as you can see from the chart above.

Judging by how the number of net-nets has evolved over the past decade since 2005 (with the low-point being the second half of 2007 when there were less than 50 net-nets and the high-point being early 2009 when there were nearly 200 of them), it seems to me that Singapore’s stock market right now is nearly right smack in the middle of being cheap and expensive.

This conclusion is a little similar to the one we had when we looked at the Straits Times Index’s PE ratio.

A Fool’s take

This read of two different valuation measures for Singapore’s stock market tells us that shares here are generally not too expensive nor very cheap (though there’s a tilt toward it being slightly cheap if we’re looking at things from a PE-ratio-basis) – and that’s news that probably wouldn’t sound too bad to investors.

Here’s a word of caution though: It’s important to note that while these pieces of information can be useful from a long-term investing perspective, it serves no utility whatsoever in telling us what the market will do over the short-term future. That’s because cheap shares can see their prices falling over the short-term, just as expensive shares can go on to climb even higher.

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.