One of my investing habits is to look at how cheap or expensive stocks in Singapore are at the start of every month. I’ve a good reason for doing so. Howard Marks is an astute market commentator and the co-chairman of Oaktree Capital, an investment firm with a solid long-term track record and assets under management of US$97 billion as of end-2015. In a recent interview, Marks was asked 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…
One of my investing habits is to look at how cheap or expensive stocks in Singapore are at the start of every month. I’ve a good reason for doing so.
Howard Marks is an astute market commentator and the co-chairman of Oaktree Capital, an investment firm with a solid long-term track record and assets under management of US$97 billion as of end-2015. In a recent interview, Marks was asked 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 knowing the state of the market (in other words, having an idea of “where we are”), I can gain important perspective and thus invest accordingly.
There are two methods to gauge the stock market’s value that I like to use. The first involves simply comparing the market’s current valuation with a long-run average figure.
In our local context in Singapore, the ‘market’ can be represented by the Straits Times Index (SGX: ^STI). Meanwhile, data on the fundamentals of the SPDR STI ETF (SGX: ES3) can be a good proxy for that of the Straits Times Index. This is because the former is an exchange-traded fund which closely mimics the fundamentals of the latter.
With this in mind, here are some of the key valuation numbers I’m interested in:
- The SPDR STI ETF closed 31 March 2015 with a price-to-earnings (PE) ratio of 11.7.
- The Straits Times Index had an average PE of 16.9 in the 37 year period stretching from 1973 to 2010.
- Good instances of the Straits Times Index’s PE being at extremes can be found in 1973 and 2009. In 1973, the index had a high PE of 35; at the start of 2009, the index had a historical PE of just 6.
Looking at the various PE ratios above, I think it’s fair to say that stocks in Singapore are nowhere close to being expensive at the moment. And while we’re also clearly not in fire-sale bargain territory, it looks like stocks in Singapore are currently still cheaper than average.
Another way to discern value
The second method for determining the stock market’s value lies in finding out the number of net-net shares that are available.
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 current asset value is simple and the formula’s found below (all figures can be found in a company’s balance sheet):
Net current asset value = Total current assets – Total liabilities
In theory, a net-net share is a great bargain because an investor can get his hands on the share’s current assets (things like cash, IOUs from customers, and inventory) net of all liabilities. Meanwhile, the share’s fixed assets (think real estate, factories, equipment with long lives etc.) are also thrown into the mix for free.
So, if net-net shares start appearing in large quantities, it’s likely that the stock market is really cheap. The following chart illustrates how the number of net-net shares in Singapore’s stock market have changed since 2005:
Source: S&P Global Market Intelligence; author’s calculations
There are two time periods that I’d like to highlight in the chart. The first is the second-half of 2007 – back then, the net-net count had shrunk to a low of less than 50. The second is the first-half of 2009 – during that timeframe, the net-net count had shot to a high of nearly 200. Those of you who are sharp may also recognise that the two periods had coincided with the occasions when 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.
At the end of March 2016, there were 140 net-net shares in Singapore’s stock market. As you can see, that number is near the highest it has been since the first-half of 2009. Based on the net-net count, I think it’s reasonable to conclude that stocks in Singapore are clearly not expensive, though there’s still some way to go before the market can be called dirt-cheap.
A Fool’s take
We’ve seen two different valuation yardsticks for Singapore’s stock market and they both point to similar conclusions: Stocks in Singapore are not crazily cheap, but they’re nowhere near being terribly expensive either.
As an investor, this sounds like decent news to me at the very least. But all that being said, investors may want to note that the current valuation of stocks have very little say on how the market will perform over the short-term. Cheap stocks can easily become cheaper in the short run – the valuation of stocks only tend to have a heavier influence on their performance over the long run.
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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.