It?s great to take a pulse-reading of the market from time to time so that we can have some perspective on where we stand and thus react accordingly. It?s for this reason that I?ve developed a habit of looking at how cheap or expensive stocks in Singapore are at the start of every month.
Bearing in mind that our odds of success as an investor are higher when, all things being equal, stocks are cheap (carrying a low valuation) as compared to when they?re expensive (carrying a high valuation), let?s see where the market is at today.
A simple way…
It’s great to take a pulse-reading of the market from time to time so that we can have some perspective on where we stand and thus react accordingly. It’s for this reason that I’ve developed a habit of looking at how cheap or expensive stocks in Singapore are at the start of every month.
Bearing in mind that our odds of success as an investor are higher when, all things being equal, stocks are cheap (carrying a low valuation) as compared to when they’re expensive (carrying a high valuation), let’s see where the market is at today.
A simple way to gauge how cheap or expensive stocks are at present can involve a comparison of the stock market’s current price-to-earnings (PE) ratio with that of its long-term average.
In Singapore’s context, the “stock market” is usually synonymous with the Straits Times Index (SGX: ^STI), the most widely-followed market benchmark that’s made up of 30 of some of the largest stocks by market capitalisations here.
The following’s how the index’s valuation looks like now:
- As of 1 July 2015, the SPDR STI ETF (SGX: ES3) has a trailing PE ratio of 13.4; this can be taken to be a close proxy for the actual PE ratio for the Straits Times Index since the SPDR STI ETF is an exchange-traded fund which mimics the fundamentals of the index.
- Meanwhile, the Straits Times Index’s average PE ratio over the 37-year period stretching from 1973 to 2010 is 16.9.
By comparing the two different PE ratios – the current PE of 13.4 and the long-term average PE of 16.9 – we can see how the market’s nearly in the middle of the spectrum between dirt-cheap and crazy-expensive.
For some context on what dirt-cheap can look like, we can go back to the start of 2009, when the Straits Times Index had a PE ratio of just 6; as for crazy-expensive, we’d have to travel back to 1973 when the index was selling for 35 times its earnings!
Another look at value
There are other ways to look at the market’s valuation and one which I find useful is the number of net-net shares which exist in the market at the moment.
A net-net share is a company which has a market capitalisation that’s lower than its net current asset value; the net current asset value of a firm’s given in the simple equation below:
Net current asset value = Total current assets – Total liabilities
Net-net shares can be considered to be really cheap bargains (theoretically at least) because investors are getting a discount on the shares’ current assets – things like cash and inventory – net of all obligations. To sweeten the deal, the shares’ fixed assets – think real estate, factories, equipment etc. – are thrown into the mix for free.
When net-net shares start appearing in large quantities, I trust the logic is easy enough to follow that the stock market as a whole would likely be really cheap. Keeping all these in mind, here’s where we are now (click chart for larger image):
Source: S&P Capital IQ
As you can see from the chart above, over the past decade-plus period since the start of 2005, the number of net-net shares have swung from a low of less than 50 (seen in the second half of 2007) to a high of nearly 200 (in the first-half of 2009).
It’s worth pointing out too that the low and high points for the number of net-net shares (which signify a state of the stock market being really expensive and stocks being really cheap, respectively) also roughly coincided with the Straits Times Index’s peak and trough during the recent Great Financial Crisis of 2007-09.
To that point, the index had hit an all-time high of more than 3,900 points in mid-October 2007 and had subsequently bottomed-out at slightly less than 1,500 in early-March 2009.
With 108 net-net shares in the market at the moment, it wouldn’t be unreasonable to say that the stock market looks to be somewhere in the middle between being cheap and expensive. This is not far from the conclusion we got when we studied the Straits Times Index’s PE ratio.
A Fool’s take
This look at two different ways to value the market have both pointed toward a similar takeaway: Singapore’s stock market is nowhere near the extreme ends on the cheap-expensive spectrum.
It’s not bad news for investors at all as stocks in Singapore are still a big step away from being in a massively over-valued situation.
But all that said, it’s worth stressing about something important regarding all the data I’ve presented: They’re useful to note if you’re using them to make long-term investing decisions; they’re of no utility whatsoever if you’d like to use them for short-term investing decisions. How cheap or expensive stocks are at the moment can’t tell us much about what they’d do over the next week, month, or even year.
If you'd like more investing insights as well as 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.
The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to follow our latest news and articles.
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.