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Are Investors Getting a Bargain or a Bad Deal Now with Singapore’s Stock Market?

At the beginning of every month, I’ve a habit of looking at how expensive or cheap the stock market in Singapore is.

I do so for a good reason: We can stack the odds of success in our favour if we buy shares when they’re cheap.

As tomorrow, 1 May 2015, would be a holiday, I thought I’d evaluate the state of the market a day earlier instead.

Finding value in the market

There’s a simple way to gauge how expensive (or cheap) shares are in Singapore using the current price-to-earnings (PE) ratio of the market barometer, the Straits Times Index (SGX: ^STI).

And for that, we can turn to the SPDR STI ETF (SGX: ES3), an exchange-traded fund which closely tracks the fundamentals of the index. Data from the SPDR STI ETF shows that it’s currently selling for around 14 times its trailing earnings.

For some perspective, the Straits Times Index has a long-term average PE ratio of 16.9 for the period from 1973 to 2010.

So while the Straits Times Index is clearly not dirt-cheap now (the index was dirt-cheap back at the start of 2009 when it had a PE ratio of just six), investors might still be heartened to know that the stock market in Singapore is also not anywhere close to being crazily expensive at the moment.

Finding value in a different way

There’s another valuation measure I like to observe and that’s the number of net-net shares which currently exist. A net-net share is a company with a market capitalisation that’s lower than its net current asset value (total current assets minus total liabilities).

Net-net shares are generally regarded to be really cheap bargains because investors are basically getting a discount on the shares’ current assets (like cash and inventory) net of all obligations. To sweeten the deal, the shares’ fixed assets (like properties, factories, equipment etc.) are thrown in for free.

It thus follows that the market as a whole will be very cheap if net-net shares start appearing in large quantities.

With this in mind, here’s where we stand currently:

Number of net-net shares in each quarter starting from 2005 (April 2015)

Source: S&P Capital IQ

As of 29 April 2015, there are 92 net-net shares in Singapore’s stock market. The chart above shows how the number of net-net shares has evolved over the past decade since the start of 2005.

If we compare the 92 figure we see today with the peak (nearly 200 net-net shares in the second half of 2009) and the trough (less than 50 net-net shares in the second-half of 2007), we can see that the market’s somewhere in the middle between cheap and expensive – but possibly leaning slightly toward the expensive end.

That’s a conclusion that’s not too far from the one we got when I took a look at the Straits Times Index’s PE ratio.

A Fool’s take

What I have with the two different valuation measures points to how Singapore’s stock market is currently at a Goldilocks type of “temperature” – it’s not too hot nor too cold.

This isn’t exactly bad news for investors, given that the market’s nowhere near being crazy expensive at the moment.

But in any case, here’s a word of caution about all these data you’ve seen. They’re important to note if you’re using them to make long-term investing decisions; they’re of no use whatsoever if you’re thinking of using the data for short-term investing. How cheap or expensive shares are at the moment can’t tell us much about their short-term returns.

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.