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Singapore’s Stock Market Now: Cheap or Expensive?

It has been an interesting third quarter for Singapore’s stock market.

After peaking at 3,550 points for the year in April, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), then proceeded to fall hard, eventually reaching a bottom of 2,740 points, near the end of September. At that level, the stock market had entered bear market territory.

Fortunately, a strong rebound then took place in October, leading to the index closing at 3,006 – some 9.7% higher than the September low – last Friday.

After all these ups and downs, it may be a good idea to look beneath the hood at the market’s value to have a better appreciation of where things really stand 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 historical average can be a simple but effective way to gauge how cheap or expensive stocks here are.

Data on the fundamentals of the SPDR STI ETF (SGX: ES3) can be used as an effective proxy for that of the Straits Times Index. That’s because the former is an exchange-traded fund which closely mimics the latter. Here are how the key valuation numbers stack up:

  • The SPDR STI ETF has a trailing PE of just 12, as of 6 November 2015
  • The Straits Times Index has an average PE of 16.9 over the 37 years stretching from 1973 to 2010
  • In the 37-year period above, two occasions stand out for having extreme valuations. 1973 was a year when the Straits Times Index was valued at 35 times its earnings; meanwhile, the start of 2009 saw the index carrying a historical PE of just 6.

So while Singapore’s stock market is certainly not dirt-cheap at the moment, there’s still a strong case to be made that stocks are in bargain territory, given the lower-than-average PE ratio.

Value from another perspective

There’s another useful approach to gauge the market’s value and that is to determine the number of net-net shares that are available.

There are two important financial figures we have to look at to know whether a share can be considered to be a net-net: Its market capitalisation and its net current asset value (NCAV). Mathematically, here’s how the NCAV of a share is calculated:

Net current asset value = Total current assets – Total liabilities

Net-nets are essentially shares which have a market capitalisation that’s lower than their NCAVs. In theory, they are massive bargains. With a net-net share, investors are getting a discount on its current assets (things like cash and inventories) net of all obligations. As a further benefit, the share’s fixed assets (things like real estate and factories) are thrown in for free.

It follows logically that the market would be cheap if net-net shares start appearing in large quantities. With that, here’s where we currently stand on the net-net count (click the chart below to enlarge):

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

Source: S&P Capital IQ

As of 6 November 2015, there are 116 net-net shares in Singapore’s stock market. You can tell from the chart that the number rests snugly between the peak and trough for the net-net count since the start of 2005.

Over the past decade-plus period under study, the lowest number of net-nets (less than 50) had occurred in the second-half of 2007. Meanwhile, the number of net-nets had spiked to nearly 200 in the first-half of 2009. It’s worth noting that the second-half of 2007 and the first-half of 2009 were occasions when the Straits Times Index had reached its high and low points, respectively, during the Great Financial Crisis.

Given the net-net numbers we have on hand now, I think it’s fair to say that stocks are nowhere near the extreme ends of the cheap-to-expensive spectrum. I’d also argue that we’re closer to the cheaper-end than we are to the pricier-limit, as the number of net-nets is near the highest it’s been since 2010.

A Fool’s take

We’ve just banged through two different ways of estimating the value to be found in Singapore’s stock market and both have brought us to similar conclusions: Stocks in Singapore are nowhere near being expensive at all and we’re even edging closer to bargain territory. That may be encouraging for investors.

But in case you think that all we’ve seen leads to the conclusion that stocks are primed for a quick recovery, here’s something else to keep in mind: How cheap or expensive stocks are at the moment can’t tell us what they’d do over the next day, week, month, or even year. Valuation data becomes useful only over longer time horizons.

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.