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The State Of Singapore’s Stock Market: Are Stocks Cheap Or Expensive Now?

I’ve a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month. I do so for a good reason.

Howard Marks, the co-chairman of Oaktree Capital, an investment firm with US$97 billion in assets under management at end-2015, was asked in a recent interview how investors should prepare for the future. He responded:

“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.””

By having a view of where things stand with the local stock market right now, it can help me gain perspective and invest accordingly.

Finding value

There are two ways to gauge the market’s value that I like to employ. The first method is simple: We can compare the market’s current valuation to its long-run average.

In Singapore’s context, the ‘market’ can be represented by the Straits Times Index (SGX: ^STI). In turn, data on the fundamentals of the SDPR STI ETF (SGX: ES3) can be a good proxy for the Straits Times Index. That’s because the former is an exchange-traded fund which closely mimics the latter.

Here are some of the important valuation figures that I’m interested in:

  • The SPDR STI ETF has a price-to-earnings (PE) ratio of 11.1 as of 29 February 2016.
  • Over the 37 years from 1973 to 2010, the Straits Times Index has had an average PE of 16.9.
  • Some good examples of extreme valuations can be found in 1973 and 2009. In the former, the Straits Times Index had a high PE ratio of 35; meanwhile, the index carried a historical PE of just 6 at the start of the latter year.

Given the PE ratios we’ve just seen, I think it’s reasonable to reach a conclusion that stocks in Singapore are nowhere near being crazily expensive. And while the market’s valuation is also not close to being dirt-cheap, stocks are currently cheaper than average.

Finding value, redux

The second method for assessing the state of the market lies in determining the number of net-net shares that are appearing right now.

A net-net share is a share whose market capitalisation is less than its net current asset value. The math needed to calculate the net asset current value is simple with the formula given below. All the figures can also be found on a company’s balance sheet.

Net current asset value = Total current assets – Total liabilities

Theoretically, a net-net share can be thought of as a great bargain. That’s because an investor can get his hands on the share’s current assets (thinks like cash, IOUs from customers, and inventory) net of all liabilities. Meanwhile, the share’s fixed assets (things like properties, factories, and equipment with long lives) are thrown into the mix for free.

It thus follows that if there’s a glut of net-net shares appearing in the market, then it’s likely that the market’s really cheap. You can see where we are right now on the net-net count from the chart below, which plots the number of net-net shares in Singapore’s market since 2005:

Net-net count (February 2016)
Source: S&P Global Market Intelligence; author’s calculations

There are two time periods to note on the net-net share chart. They are the second-half of 2007 and the first-half of 2009. In the former, the net-net count had sunk to less than 50, forming a trough in the time-frame we’re looking at. In the latter, the net-net count had hit a peak of nearly 200.

Some of you may realise that the two occasions also coincided with the times that the Straits Times Index had reached its high point (second-half of 2007) and low point (first-half of 2009) during the Great Financial Crisis of 2007-09.

As of 29 February 2016, we have 136 net-net shares in Singapore’s stock market. That’s near the highest number seen since the first-half of 2009 (the highest was at end-January 2016 when there were 149 net-net shares). With this, I think it’s fair to say that stocks in Singapore are actually much closer to the cheap-end as compared to the expensive one on the value-spectrum.

A Fool’s take

The two different methods to measure the state of Singapore’s stock market that we’ve seen point to similar conclusions: Stocks are not in fire-sale bargain territory right now, but valuations are clearly not demanding too.

As an investor, these sound like decent news to me at the very least. But that being said, it’s worth noting that the current valuations of stocks cannot tell us how the market will perform over the short-term. What’s cheap can just as easily get cheaper in the short run – valuations only have a heavier say over the long run.

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.