1 Thing That Investors Should Know About the Market Now

Credit: andrechinn

I think it’s very reasonable to assume that the one question investors in Singapore have in mind at the moment is this: Are stocks in Singapore cheap now?

That’s a question that applies for almost everyone, regardless of whether you are a growth investor interested in a fast-growing company like Raffles Medical Group Ltd (SGX: R01), a value investor who has his eyes set on companies trading below their book values such as SembCorp Industries Limited (SGX: U96), or an income investor with a focus on high-yielding real estate investment trusts such as Capitaland Mall Trust (SGX: C38U).

The question I have posed also has added significance, given that Singapore’s market barometer, the Straits Times Index (SGX: STI), has declined by more than a quarter since peaking at 3,550 points in April 2015.

While the following indicator should not be the only thing an investor uses to understand how cheap or expensive stocks here are, it can still be useful in giving us an additional perspective. That indicator is the amount of share buybacks by listed companies in Singapore.

The buyback scheme was introduced in Singapore in 1999. In 2015, some S$2 billion worth of shares were bought back by companies listed in Singapore, smashing the previous high of S$1.07 billion seen in 2008 during the global financial crisis.

Below is a chart showing the breakdown of share buybacks that had occurred in 2015.

SGX share buybacks

Source: SGX

Now, why are share buybacks important for investors? As I have explained in a previous article, companies may engage in share buybacks when their management perceives the stock to be undervalued.

So, with the record high buybacks in 2015, it may be a signal to investors that the management teams of Corporate Singapore think that stocks are cheap. Of course, even if management really thinks that stocks are cheap, it does not necessarily mean that they are correct – that’s our duty as investors to determine.

As I mentioned earlier, tracking stock buybacks is just one additional tool we can add to our investing toolkit for understanding the market.

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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 contributor Lawrence Nga does not own shares in any companies mentioned above.