Singapore’s Stock Market May Be Cheap Now, But Caution from Investors Is Still Needed

In an article I published earlier today titled “Should Investors Worry About Singapore’s Stock Market Now?”, I pointed out that the Straits Times Index (SGX: ^STI), Singapore’s market barometer, is currently carrying a valuation that looks cheap when seen through the long lens of history.

But, I also warned about something in my earlier article which I’d like to expand upon here:

“…The annals of history may point toward the Straits Times Index as having a cheap valuation now, but that shouldn’t be applied to individual stocks. At any moment in time, individual stocks can offer vastly different risk/reward characteristics from that of the market. Keep this caveat in mind whenever you invest.”

Same time, different values

There are 30 different shares that make up the Straits Times Index and even within the index’s constituents, there are more than a handful of shares that have significantly different valuations from that of the index.

Based on its closing price last Friday, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which closely mimics the fundamentals of the Straits Times Index – has a trailing price-to-earnings (PE) ratio of 13.8. Meanwhile, we see index components Keppel Corporation Limited (SGX: S51) and Starhub Ltd (SGX: CC3) being valued at trailing PE ratios of 8.4 and 19.9 respectively.

Large differences in the valuation figures that Keppel Corp, Starhub, and the SPDR STI ETF currently sport are good examples of how individual stocks can offer “vastly different risk/reward characteristics from that of the market” at any one point in time.

Same time, different returns

Such a phenomenon can lead to shares of individual companies moving in very different directions from that of the market.

The Straits Times Index is still roughly 10.5% lower today than its all-time high close of 3,876 points on 11 October 2007. But over the same timeframe, shares like Super Group Ltd (SGX: S10) and Riverstone Holdings Limited (SGX: AP4) have gained 194% and 207% respectively while the likes of Neptune Orient Lines Ltd  (SGX: N03) has seen its shares crumble, losing 79% of their value.

Earnings for Super, Riverstone, and Neptune Orient Lines

Source: S&P Capital IQ

Discrepancies in the market returns of the aforementioned trio are aptly explained by the table above, which shows how the profits for the three firms have changed over the years; while Super Group and Riverstone have enjoyed growing earnings and thus been building up the intrinsic value of their businesses, shipping firm Neptune Orient Lines has been bleeding red ink and thus been destroying value.

A Fool’s take

If you’re investing in the shares of individual companies, it’s very important to note that what “the market” may do can be worlds’ apart from the eventual performance of your shares. The Straits Times Index may be cheap now on a historical basis, but investors should still be very careful with their individual shares.

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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 owns shares in Super Group.