The State of Singapore’s Stock Market Now: Cheap or Expensive?

I’ve a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month. Taking a pulse of the market enables me to gain some perspective so that I can react and invest accordingly.

Finding value

One simple way to gauge the current state of the market would be to compare the Straits Times Index’s (SGX: ^STI) current price-to-earnings (PE) ratio with its long-term average figure.

Data on the fundamentals of the SPDR STI ETF (SGX: ES3) will be useful for our purposes here since it is an exchange-traded fund which closely tracks the Straits Times Index. Here are how some of the important valuation numbers look like:

  • The SPDR STI ETF currently has a PE ratio of 12.
  • The Straits Times Index has had an average PE of 16.9 over the 37 years stretching from 1973 to 2010.
  • Two occasions have stood out over that timeframe for egregious valuations. 1973 was a year when the Straits Times Index was highly valued with it trading at 35 times its earnings. The start of 2009, on the other hand, saw Singapore’s market barometer carrying a historical PE of just 6.

Given the figures we’ve seen above, stocks in Singapore are quite clearly in the middle of being expensive and cheap. A strong case can even be made that local stocks are nearer the cheap-end than the expensive-section given the index’s lower-than-average PE ratio at the moment.

Finding value from a different lens

Another useful indicator for how cheap or expensive stocks are would be the number of net-net shares that 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. The math involved in finding the net current asset value is found in the following equation:

Net current asset value = Total current assets – Total liabilities

Theoretically, a net-net share is a great bargain. That’s because investors are getting a discount on the stock’s current assets (things like cash on hand and inventory) net of all obligations. But that’s not all – the stock’s fixed assets (which consist of properties, factories, equipment, etc.) are also offered for free.

I trust it’s easy to follow the logic that the market is cheap if net-net shares start appearing in large numbers. With that, here’s a chart showing we stand on the net-net share count at the moment:

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

Source: S&P Capital IQ; author’s calculations (click to enlarge)

As of 30 November 2015, there are 129 net-net shares in the Singapore market.

The chart above also plots the number of net-net shares that have appeared since the start of 2005. In the period under study, we’ve had a peak net-net share count in Singapore of nearly 200 in the first-half of 2009 and a trough of less than 50 in the second-half of 2007.

It’s worth noting that the first-half of 2009 and the second-half of 2007 were occasions when the Straits Times Index had reached its low and high points, respectively, during the Great Financial Crisis.

With the current net-net count of 129, I think it’s fair to say that stocks in Singapore are nowhere near being crazy cheap or expensive at the moment. I would add too that the number of net-net shares we have now is near the highest it’s been since 2009. So, local stocks may not be too far from being cheap based on this measure.

A Fool’s take

The two different approaches to gauge the market’s value that we’ve looked at have both given us similar conclusions: While stocks in Singapore are not dirt-cheap (and quite clearly nowhere near being pricey), the valuations does not look too demanding. That may be encouraging news for investors.

With all that being said, it’s worth keeping in mind something important. All that you’ve seen above have no use whatsoever in helping you with short-term investment decisions. How cheap or expensive stocks are can’t tell you 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.