I?ve a habit of looking at how expensive shares in Singapore are at the start of every month.
I do so because buying shares when they?re expensive is a recipe for disaster. Conversely, buying them when they?re cheap would be a good way to stack the odds of success in my favour.
With today being the start of a new month, let?s get going.
The language of valuation
To get a handle on the state of the market at the moment, one way to do so would be to look at the current price-to-earnings (PE) ratio of Singapore?s stock market barometer, the…
I’ve a habit of looking at how expensive shares in Singapore are at the start of every month.
I do so because buying shares when they’re expensive is a recipe for disaster. Conversely, buying them when they’re cheap would be a good way to stack the odds of success in my favour.
With today being the start of a new month, let’s get going.
The language of valuation
To get a handle on the state of the market at the moment, one way to do so would be to look at the current price-to-earnings (PE) ratio of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI).
For that, we can turn to data from the SPDR STI ETF (SGX: ES3), an exchange-traded fund which closely mimics the fundamentals of the Straits Times Index.
Currently, the SPDR STI ETF is selling for 14 times its trailing earnings. That’s a favourable valuation when compared to the index’s long-term average PE of 16.9 from 1973 to 2010.
While we’re clearly nowhere near dirt-cheap status now (the start of 2009 could be classified as dirt-cheap as the Straits Times Index was selling for around six times its traling earnings back then), it’s also good to note that the market’s not anywhere close to having bubbly valuations at the moment.
Another valuation measure
Another figure I like to look at to figure out how cheap or expensive shares are would be the number of net-net shares that are currently available. A net-net share is a company which has a market capitalisation that’s lower than its net current asset value (total current assets minus total liabilities).
Such shares are generally thought of to be great bargains because investors are essentially getting a discount on the shares’ current assets (like cash and inventory) net of all liabilities. As icing on the cake, fixed assets (consisting of properties, factories, equipment etc.) are thrown into the mix for free.
It thus follows that the market would likely be cheap on the whole if net-net shares start appearing in large numbers. Here’s where we stand at the moment (click on chart for a larger image):
Source: S&P Capital IQ
As of 31 March 2015, there are 105 net-net shares in Singapore’s stock market.
Over the decade captured in the chart, the number of net-net shares reached a low of below 50 in the second half of 2007 and crested a high of nearly 200 in early 2009. With that as a backdrop, shares in Singapore are likely to be in the middle of being cheap and expensive now.
That’s a similar conclusion to the one we had when looking at the market’s PE ratio.
A Fool’s take
Given what I’ve seen with the two different valuation measures, the conclusion I have is that the market’s at a Goldilocks type of valuation now between cheap and expensive with a slight tilt toward the cheap end of the spectrum.
That’s news that probably wouldn’t sound too bad to investors.
In any case, here’s a word of caution about all the data I’ve presented: They are important to note from a long-term investing perspective, but they are of no use whatsoever when it comes to telling us what shares will do in the short-term future. Cheap shares can go on to become even cheaper over the short-term while expensive shares can continue climbing too.
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.