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Attention Investors: Are Stocks In Singapore Pricey Or Cheap Now?

I’ve a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month. I do that to know where things stand so that I can react accordingly.

It’s been a wild month for the stock market in August. With today being the start of September, let’s see if there’s any value to be found in the market now.

Finding value

A simple way to gauge how cheap or expensive stocks are in Singapore would be to compare the stock market’s current valuation with its long-term history.

In Singapore’s context, the “market” is often used to mean the Straits Times Index (SGX: ^STI), an index that’s comprised of 30 of some of the largest listed companies in Singapore’s stock market.

As for a look at the fundamentals of the Straits Times Index, we can use the data from the SPDR STI ETF (SGX: ES3) as a close proxy; the exchange-traded fund tracks the fundamentals of the Straits Times Index.

This is what we have at the moment:

  • The SPDR STI ETF is valued at just 11.6 times its trailing earnings as of 31 August 2015.
  • The Straits Times Index’s average PE ratio over the 37-year period stretching from 1973 to 2010 had been 16.9.

As the data above shows, the market’s certainly nowhere near being crazy-expensive at the moment. While stocks look cheap historically, it should be noted too that they’re not dirt-cheap yet.

For a sense of what the extremes look like, we’d have to do some time travelling.

1973 was a year when the market went bonkers on the expensive-end – the Straits Times Index was valued at a price-to-earnings (PE) ratio of 35! Meanwhile, 2009 was a good example of what the other extreme is like – at the start of the year, the Straits Times Index was valued at just six times its trailing earnings.

A second opinion                          

There’s another way to value the stock market which I like to use and that is to determine the number of net-net shares which are available in the market at the moment.

A net-net share is one which has a market capitalisation that’s lower than its net current asset value. You can see the mathematical formula for the net current asset value below:

Net current asset value = Total current assets – Total liabilities

Theoretically, a net-net share can be considered to be a great bargain because investors are getting a discount on the share’s current assets (things like cash, inventory, and payments from customers that are due to be paid) net of all liabilities. To sweeten the deal further, the share’s fixed assets (think properties, factories, equipment etc.) are thrown into the mix – for free.

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

With that, here’s where we stand on the net-net count:

Number of net-net shares in each quarter starting from 2005 (31 August 2015)

Source: S&P Capital IQ

There are 122 net-net shares in Singapore’s stock market as of 31 August 2015. And as you can see from the chart, this number sits between the low and high points for the number of net-net shares that has appeared in Singapore since the start of 2005.

At the low point, which corresponds to an expensive market, there were less than 50 net-net shares. This occurred in the second-half of 2007. Meanwhile, the high point, which is a signal for a cheap market, fell on the first-half of 2009; back then, there were nearly 200 net-net shares lying around.

I had already mentioned that there are 122 net-net shares in Singapore’s stock market right now. It’s thus fair to say that stocks in Singapore are currently nowhere near the extremities of the cheap-to-expensive spectrum.

A Fool’s take

We’ve looked at the state of the market using two different valuation measures and reached roughly the same conclusion – that stocks in Singapore are still far from being crazily expensive. That can be encouraging news for investors.

With all that being said, here’s an important note I’d like to end this article with: All the data you’ve seen can be useful in formulating long-term investing decisions, but they’ve no utility whatsoever for making short-term ones. How cheap or expensive stocks are right now can’t tell us what they’d do over the next day, 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.

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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.