Investors Take Note: Are Stocks In Singapore Expensive Or Cheap Now?

I have a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month. Why you may ask?

Howard Marks, the co-chairman of the giant investment firm Oaktree Capital, once said in an interview that “We may never know where we’re going, but we’d better have a good idea where we are.” Put another way, by knowing the state of the market at the moment (knowing where we stand), it can give us perspective on how to invest.

Finding value – part 1

There are two ways I like to use to gauge how pricey stocks in Singapore may be. The first is simple and involves a comparison of the stock market’s current valuation with some historical numbers.

In Singapore’s context, the stock market can be represented by the Straits Times Index (SGX: ^STI). In turn, data on the fundamentals of the SPDR STI ETF (SGX: ES3) can serve as a good proxy for those of the Straits Times Index; the SPDR STI ETF is an exchange-traded fund that closely mimics the fundamentals of the market benchmark.

With the above in mind, here are some of the important valuation numbers I’m interested in:

  • The SPDR STI ETF currently has a price-to-earnings (PE) ratio of 12.
  • The Straits Times Index has an average PE of 16.9 for the 37 year period stretching from 1973 to 2010.
  • Cases when the Straits Times Index had reached extreme valuation levels can be found in 1973 and 2009. In the former, the index had a PE of 35. As for the latter, the index was valued at a historical PE of just 6 at the start of the year.

Comparing all the valuation figures above lead me to this: Stocks in Singapore are clearly nowhere near being crazily expensive. But while they’re also not in fire-sale territory, stocks here are still cheaper than average.

Finding value – part 2

The other way to have an indication of the market’s value is to determine the number of net-net shares that are available.

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

Net current asset value = Total current assets – Total liabilities

Theoretically, a net-net share is a great bargain because an investor can get his hands on the share’s current assets (things such as cash, IOUs from customers, and inventory), net of all liabilities, at a discount. Meanwhile, the company’s fixed assets (things such as real estate, factories, equipment with long lives etc.) are thrown in for free.

Following this train of thought, if net-net shares start appearing in large numbers in Singapore’s stock market, then stocks in Singapore could be really cheap.

Here’s a chart showing how the number of net-net shares in Singapore has changed since 2005:

Number of net-net shares in each quarter starting from 2005 (April 2016)
Source: S&P Global Market Intelligence; author’s calculations

There are two time periods in the chart that I want to bring to your attention. The first is the second-half of 2007 when the net-net count reached a trough of less than 50. The next is the first-half of 2009 when a high of nearly 200 net-net shares had appeared.

Some of you may recognise that the first-half of 2007 and second-half of 2009 were periods when the Straits Times Index had hit its high and low points, respectively, during the Great Financial Crisis.

At the end of April 2016, there were 132 net-net shares in Singapore’s stock market. This number is clearly nowhere near the sub-50 level seen in early 2007. It is in fact, near the highest it has been since the first-half of 2009. So, I think it’s fair to say that stocks in Singapore are much closer to the cheap end of the valuation spectrum than the expensive end.

A Fool’s take

The two different approaches I had used to value stocks in Singapore both point to a similar takeaway: While stocks here are not dirt-cheap, they are not also not remotely near expensive territory either.

As an investor, this sounds decent. At this point, it’s worth pointing out that the valuation of stocks have very little bearing on how the market will perform over the short run. Valuations have a big influence on outcomes only over the long-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.