At the start of every month, I’ve a habit of trying to determine how cheap or expensive stocks are in Singapore. I do so for a good reason. By knowing the state of the market, I can gain valuable perspective about how to invest. As investor Howard Marks once said, “We may never know where we’re going, but we’d better have a good idea of where we are.” Finding value There are two methods I like to use to gauge how cheap or expensive the stock market is. One is simpler and involves a comparison of the stock market’s…
At the start of every month, I’ve a habit of trying to determine how cheap or expensive stocks are in Singapore.
I do so for a good reason. By knowing the state of the market, I can gain valuable perspective about how to invest. As investor Howard Marks once said, “We may never know where we’re going, but we’d better have a good idea of where we are.”
There are two methods I like to use to gauge how cheap or expensive the stock market is. One is simpler and involves a comparison of the stock market’s current valuation with some historical numbers.
In the context of Singapore, the ‘market’ can be represented by the Straits Times Index (SGX: ^STI). In turn, the fundamentals of the SPDR STI ETF (SGX: ES3) can be a good proxy for those of the Straits Times Index. That’s because the former closely mimics the fundamentals of the latter.
Here are some of the valuation figures I’m interested in:
- The SPDR STI ETF currently has a price-to-earnings (PE) ratio of 11.6.
- The Straits Times Index had an average PE of 16.9 in the 37-year period from 1973 to 2010.
- For an example of a high PE, we can go back to 1973, a year when the Straits Times Index had a PE of 35. As for a low PE, the start of 2009 would be a good instance; Singapore’s market barometer was valued at just 6 times historical earnings at that time.
When we compare all the valuation figures seen above, I think it’s fair to state that stocks in Singapore are currently cheaper than average and are not anywhere close to being crazily expensive. That said, they are not at dirt-cheap levels either.
Finding value – redux
The other way to determine the value of stocks in Singapore is to find the number of net-net shares that are in the market.
A net-net share is a share whose market capitalisation is lower than its net current asset value (current assets minus total liabilities). In theory, a net-net share is a great bargain as investors can get their hands on the company’s current assets (assets such as cash and inventory) net of all liabilities. At the same time, the company’s fixed assets (assets such as real estate and factories) are available for free.
The logic thus follows that Singapore’s stock market should be cheap if net-net shares start appearing in large quantities. You can see how the number of net-net shares in Singapore has changed since 2005 in the following chart:
Source: S&P Global Market Intelligence; author’s calculations
The chart contains two time periods that I want to highlight. The first is the second-half of 2007 and the second is the first-half of 2009. As you can see, those are times when the net-net count had reached a low of less than 50 and a high of nearly 200, respectively.
Some of you may also recognise the fact that (1) the first-half of 2007 had coincided with the Straits Times Index’s high point just prior to the Great Financial Crisis, and (2) the second-half of 2009 was when the index had reached a trough during the crisis.
As of 31 May 2016, there were 131 net-net shares in Singapore’s stock market. This is clearly a long way off from the sub-50 number seen in early 2007 and is in fact near the highest the figure has been since the second-half of 2009.
As such, I think it’s also fair to say here that stocks in Singapore are closer to the cheap end of the stick rather than the expensive end.
A Fool’s take
We’ve seen two different approaches to value stocks and they both point to a similar take: Stocks are not at fire-sale territory, but they’re clearly not ridiculously expensive either.
This sounds good to me as a long-term investor. I stress the word “long-term” for good reason. The valuation of stocks tell us very little about what they’re going to do in the short run. Valuations only have a big influence on the outcomes over the long-term.
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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.