Are Stocks In Singapore Cheap Or Expensive Now?

At the start of every month, I’ve a habit of looking at how cheap or expensive stocks in Singapore are.

The reason for having frequent assessments of where things stand at the moment is described aptly by the great investor Howard Marks. In a recent interview, Marks said the following:

“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.””

Taking a pulse of the market’s value enables me to gain perspective so that I can react and invest accordingly.

In search of value

There are two ways I like to use to gauge the market’s value. The first is simple and it involves a comparison of the market’s current price-to-earnings (PE) ratio with a long-run average figure.

In Singapore’s context, the market can be represented by the Straits Times Index (SGX: ^STI). In turn, the fundamentals of the Straits Times Index can be gleaned from the SPDR STI ETF (SGX: ^STI); the latter is an exchange-traded fund which closely mimics the former.

With that, here are the important PE ratios I’m interested in:

  • As of 31 January 2016, the SPDR STI ETF has a PE ratio of 10.9.
  • The Straits Times Index has had an average PE of 16.9 over the 37 year period between 1973 and 2010.
  • Extreme PE ratios had appeared in 1973 and 2009 when the market was very expensive and cheap, respectively. In the former, the Straits Times Index had carried a PE ratio of 35. At the start of the latter year, the index had a historical PE of just 6.

Based on the PE ratios I’ve just described, I think it’s reasonable to say that stocks in Singapore are much closer to the cheap end than to the expensive one on the value-spectrum.

That’s healthy for investors as the odds of our investing success go up when we buy stocks when they’re cheap and hold them for the long-term. That said, it’s also clear we’re not in fire-sale bargain territory at the moment.

Searching for value in a different way

The second way for gauging the market’s value comes from determining the number of net-net shares that are currently available in Singapore’s stock market.

A net-net share is a stock whose market capitalisation is lower than its net current asset value. The financial figures needed to calculate the net current asset value are found in a company’s balance sheet and the math is given as such:

Net current asset value = Total current assets – Total liabilities

In theory, a net-net share can be thought of as a great bargain. That’s because investors are getting a discount on the company’s current assets (thinks like cash, inventory, and bills from customers that are to be paid soon) net of all liabilities. To top it off, the company’s fixed assets (things like real estate, factories, and equipment with long lives) are thrown into the mix for free.

It thus follows that the market may be really cheap if net-net shares start appearing in large quantities. Here’s where we stand on the net-net count now:

Number of net-net shares in each quarter starting from 2005 (1 Feb 2016)
Source: S&P Capital IQ; author’s calculations

There are two key timeframes to observe in the chart above, which plots the number of net-net shares in Singapore’s stock market that have appeared in each quarter since 2005. The first is the second-half of 2007, when the net-net count dwindled to less than 50; the second is the first-half of 2009, when the number of net-net shares had spiked to nearly 200.

The two occasions were also when the Straits Times Index had reached its high (second-half of 2007) and low (first-half of 2009) points during the Great Financial Crisis of 2007-09.

We can see that there are 149 net-net shares in Singapore’s stock market as of 31 January 2016. This number is the highest the net-net count has been since the first-half of 2009. As such, I think it is fair to say that local stocks are not anywhere near being expensive and are actually not too far from being cheap.

A Fool’s take

The two different approaches to measure the value of Singapore’s stock market that we’ve used have given us similar conclusions: Stocks are not at dirt-cheap levels here, but valuations are also quite clearly not demanding at all.

With all that being said, it’s worth noting that the current valuations of stocks cannot tell us what the market will do over the short-term.

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 weekly 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.