Investors, Are Stocks In Singapore Expensive Or Cheap Now?

It’s useful to feel the pulse of the stock market from time to time so that we can know where things stand and thus react accordingly. It’s for this reason that I’ve developed a habit of looking at how expensive or cheap stocks are in Singapore at the start of every month.

As investors, buying stocks when they’re cheap helps place the odds of success in our favour. With that in mind, let’s see where the market stands today, given that the start of August, which is tomorrow, is a Saturday.

Gauging value

One simple and convenient way to gauge how expensive or cheap stocks in Singapore are is to compare the market’s current valuation with its long-term historical averages.

In Singapore, the “stock market” is often represented by the Straits Times Index (SGX: ^STI), a collection of 30 of the largest listed companies in Singapore.

Meanwhile, data from the SPDR STI ETF (SGX: ES3) can serve as a good proxy for that of the Straits Times Index itself given that the former is an exchange-traded fund which is set-up to closely mimic the fundamentals of the latter.

This is the current picture we have:

  • The SPDR STI ETF is valued at just 13 times its trailing earnings as of 30 July 2015.
  • The Straits Times Index’s average PE ratio from 1973 to 2010 (that’s some 37 years) had been 16.9.

From this, we can see that stocks in Singapore are nowhere near the extreme ends of the cheap-to-expensive spectrum.

For a taste of what it’s like to be at the extremes, we have to go back in time to 2009 and 1973. In the former, the Straits Times Index was valued at just 6 times its trailing earnings at the start of the year; in the latter, Singapore’s stock market benchmark had a sky-high price-to-earnings (PE) ratio of some 35.

A second opinion

Beyond the PE ratio, there’s another measure which may be useful for acting as a temperature gauge for the market and that is, the number of net-net shares which exist at the moment.

A net-net share is a company with a market capitalisation that’s lower than its net current asset value. You can see the simple mathematical formula for calculating the net current asset value below:

Net current asset value = Total current assets – Total liabilities

A net-net share can be considered to be a great bargain because investors are essentially getting its current assets (things like cash and inventory) at a discount even after netting off all liabilities. What’s more, the net-net share’s fixed assets (things like properties, factories, and equipment with a long lease of life) can be had for free. A net-net share is, in essence, worth more dead than alive.

It’s thus only logical to think that the stock market as a whole will be really cheap if net-net shares start appearing in large numbers.

Having run through all these, here’s where we stand now on the net-net front (click for larger image):

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

Source: S&P Capital IQ

As of 30 July 2015, there are 111 net-net shares in Singapore’s stock market and this sits snugly between the low and high points for the number of net-nets found in Singapore over the past decade since the start of 2005.

The low point, which signifies an expensive market, happened in the second-half of 2007, when there were less than 50 net-net shares available. Meanwhile, the high point, which points to a cheap market, occurred in the first half of 2009 when nearly 200 net-nets sprouted.

It’s worth pointing out that the times when the low and high points occurred had coincided with the Straits Times Index’s peak and trough, respectively, during the Great Financial Crisis of 2007-09. In that episode, the Straits Times Index had closed at an all-time high of nearly 3,900 points on October 2007, only to then fall to a trough of less than 1,500 on March 2009.

Given the 111 net-net shares we have now, as mentioned earlier, I think it’s fair to say that stocks in Singapore are currently nowhere near being too expensive or very cheap. This is a similar conclusion to the one we got when we had looked at the Straits Times Index’s PE ratio.

A Fool’s take

As an investor, it can be heartening to know that stocks in Singapore are still far from being crazily expensive given what we’ve seen with the two different measures of the stock market’s value.

That being said, it’s worth stressing something important here: All the data you’ve seen are useful for making long-term investing decisions; they have no utility at all for short-term decision making. 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 to talk more about this in person, come meet David Kuo and the rest of the Fool Singapore team on August 15! 

Please join us at Invest FAIR Singapore on 15 August. (Suntec Centre, Booth B-16). Come chat with us at our booth, and see our MAS-licensed Director, David Kuo, give his official SGX investor presentation.

You won't want to miss this! Add Invest FAIR Singapore to your calendar today.

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.