Investors: Is Singapore’s Stock Market Expensive or Cheap Now?

We’re in the first day of October and what a few months it has been. From a peak of 3,550 in April, Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), has fallen by more than 20% to close at 2,791 yesterday.

The index’s decline may have attracted the attention of bargain hunters. But, it’s worth noting that stocks in Singapore need not necessarily be cheap just because they have fallen recently. What’s more important here is the relationship between price and value.

I’ve a habit of looking at how cheap or expensive stocks in Singapore are at the start of every month to give me perspective on where things stand so that I can react and invest accordingly. Let’s see if there’s any value to be found in the market at the moment.

A search for value

A comparison of the Straits Times Index’s current price-to-earnings (PE) ratio with that of its long-term average can be a simple way to gauge how cheap or expensive Singapore’s stock market is.

Data on the fundamentals of the SPDR STI ETF (SGX: ES3) can be used as a close proxy for the Straits Times Index given that the former is an exchange-traded fund which closely mimics the latter. Here’re how the valuation figures look like now:

  • The SPDR STI ETF has a trailing PE ratio of 11.2 as of 30 September 2015.
  • The Straits Times Index has had an average PE ratio of 16.9 over the past 37 years from 1973 to 2010.

With the numbers above, we can see that the stock market is nowhere near being crazily expensive now. That said, we’re also not close to dirt-cheap territory, though an argument can be made that stocks are closer to the cheap end of the expensive-to-cheap spectrum than the other.

We’d have to go back to 1973 and 2009 for a feel of how the extremes on the aforementioned spectrum are like: in 1973, the Straits Times Index had carried a PE of some 35; as for 2009, the index was valued at just six times its historical earnings at the start of the year.

Another lens

There’s another approach to gauging how cheap or expensive stocks are and that’s to determine the number of net-net shares which are available in the market.

A net-net share is one which has a market capitalisation that’s lower than its net current asset value. Here’s the math involved with calculating the financial number:

Net current asset value = Total current assets – Total liabilities

In theory, a net-net share’s a bargain. That’s because investors are getting a discount on the share’s current assets (things like cash on hand, inventory, and bills that its customers have to pay soon) net of all obligations. On top of that, the share’s fixed assets (think properties, factories, long-lived equipment etc.) are thrown in for free.

I trust it’s easy to see how the stock market can be considered to be cheap if net-net shares start appearing in large numbers. With that, here’s where we are on the net-net count (click the image below to enlarge):

Number of net-net shares in each quarter starting from 2005 (1 Oct 2015)

Source: S&P Capital IQ

As of 30 September 2015, there are 128 net-net shares in Singapore’s stock market. This number – as you can tell – is in between the peak and trough for the net-net count since the start of 2005.

The trough happened during the second-half of 2007 and back then, there were less than 50 net-net shares. The peak was in the first-half of 2009, in which nearly 200 net-nets popped up. Eagle-eyed readers may have realised that the second-half of 2007 and the first-half of 2009 were when the Straits Times Index had reached its high and low points, respectively, during the Great Financial Crisis.

Looking at the 128 net-net shares we have and what has happened over the past 10-plus years, I think it’s fair to say that stocks are nowhere near being crazy-expensive or laughably cheap now. Interestingly however, the number of net-nets today is near the highest it’s been since the end of the financial crisis.

A Fool’s take

Two different ways to measure value in the stock market have brought us similar conclusions: Stocks in Singapore are not anywhere near being pricey at all. And while stocks aren’t at their cheapest levels from a historical standpoint, there is some value to be found too. These can be encouraging news for investors.

Keeping all the above in mind, here’re some cautionary words about everything you’ve seen: The data can be useful in helping to form long-term investing decisions, but they’ve no utility at all when it comes to making short-term ones. How cheap or expensive stocks are at the moment have no predictive power beyond a coin flip in telling 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.