We’re in the last day of 2015. It’s that time of the year again. The time when I’m pretty sure plenty of investors out there would be wondering what the Singapore stock market has in store for them in 2016. But, to invest for the year ahead and beyond, thinking about the future is not the most important thing we should be doing – the present is where our thoughts should be. Here’s the great investor Howard Marks on the topic when he was asked what investors should do to prepare for the year ahead in a recent interview: “The most…
We’re in the last day of 2015. It’s that time of the year again. The time when I’m pretty sure plenty of investors out there would be wondering what the Singapore stock market has in store for them in 2016.
But, to invest for the year ahead and beyond, thinking about the future is not the most important thing we should be doing – the present is where our thoughts should be. Here’s the great investor Howard Marks on the topic when he was asked what investors should do to prepare for the year ahead in a recent interview:
“The most important thing to do is to assess not the future but the present. Awareness and understanding of cycles is an essential tool for investment survival. That’s why I always say: “We may never know where we’re going, but we’d better have a good idea where we are.””
So, where are we now with stock market values in Singapore? There are two ways that I like to look at the issue.
Finding value: The first way
The first way is simple: We compare the current price-to-earnings (PE) ratio of Singapore’s market barometer, the Straits Times Index (SGX: ^STI), with the long-term average number.
Data on the fundamentals of the SPDR STI ETF (SGX: ES3) can be a useful proxy for that of the Straits Times Index as the former closely mimics the latter. Here are the important PE ratios we’re interested in:
- 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 year period between 1973 and 2010.
- 1973 and the start of 2009 are good examples of occasions when the market carried outlandish valuations. In the former, the Straits Times Index traded at 35 times earnings. In the latter, Singapore’s market barometer had a historical PE of just 6.
With the different PE ratios we’ve just seen, we’re clearly not at fire sale bargain territory. But, it seems to me that stocks in Singapore are much nearer to the cheap end than to the expensive one on the value spectrum.
That’s a good thing. As investors, the odds of success are stacked in our favour if we buy stocks when they’re cheap and hold them for the long-term.
Finding value: The second way
The second way to detect how cheap or expensive stocks are in Singapore is to determine the number of net-net shares that are available in the market.
A net-net share is a stock whose market capitalisation is lower than its net current asset value. The financial numbers needed to find the net current asset value of a stock are found in the balance sheet and the math is given below:
Net current asset value = Total current assets – Total liabilities
Net-net shares are great bargains, theoretically. That’s because investors who are buying a net-net share are getting a discount on the stock’s current assets (things like cash and inventories), net of all liabilities. As a sweetener, the stock’s fixed assets (think properties, factories, machinery etc.) are thrown into the mix – for free. It thus follows that the market is cheap if there are a large number of net-net shares around.
Here’s where we stand on the net-net count at the moment:
There are two key times to note in the chart above, which illustrates how the number of net-net shares in Singapore’s stock market has evolved since 2005. As you can see, the second-half of 2007 saw the net-net count reach a low of less than 50. Meanwhile, the first-half of 2009 was when the net-net count peaked at
more than nearly 200 in the decade we’re observing.
The two key times – the second-half of 2007 and the first-half of 2009 – was also when the Straits Times Index had reached its high and low points, respectively, during the Great Financial Crisis of 2007-09.
As of 30 December 2015, we have 132 net-net shares in Singapore’s stock market – this is near the highest it’s been since 2009. Based on the net-net count, I think it’s fair to say that stocks appear to be closer to being cheap than expensive.
A Fool’s final take
We’ve seen two approaches for assessing where we are at the moment and they both point to roughly the same conclusion: Stocks are clearly not extremely cheap, but valuations are not demanding at all.
As an investor, this is music to my ears. But, do take note. While assessing the current state of the market’s value can be important for making long-term investing decisions, it tells us nothing about what stocks will do over the short-term.
2016 may turn out to be a horrible year for the market despite the decent values stocks have now. But, if that really does happen, as a long-term investor, the music will sound even sweeter to my ears.
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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.