We’re at the start of a new month – and that means it’s time for me to engage in my monthly habit of looking at how cheap or expensive stocks are in Singapore. I developed this habit for a good reason. Knowing where we stand can give us important perspective on how to proceed in the markets. The great investment thinker Howard Marks once said, “We may never know where we’re going, but we’d better have a good idea of where we are.” One way to find value I usually have two ways to gauge the value of Singapore’s…
We’re at the start of a new month – and that means it’s time for me to engage in my monthly habit of looking at how cheap or expensive stocks are in Singapore.
I developed this habit for a good reason. Knowing where we stand can give us important perspective on how to proceed in the markets. The great investment thinker Howard Marks once said, “We may never know where we’re going, but we’d better have a good idea of where we are.”
One way to find value
I usually have two ways to gauge the value of Singapore’s stocks. The first is simpler and it involves a comparison of the market’s current valuation with that of its long run historical average.
In our local context, the ‘market’ can be represented by the Straits Times Index (SGX: ^STI), an index which measures the collective price performance of a basket of 30 of some of the market’s largest companies. The index’s fundamentals in turn, can be approximated with that of the SPDR STI ETF (SGX: ES3); the SPDR STI ETF is an exchange-traded fund that closely tracks the fundamentals of the Straits Times Index.
Here are some of the important valuation numbers I’m interested in:
- The long run average: The Straits Times Index has had an average price-to-earnings (PE) ratio of 16.9 for the 37-year period stretching from 1973 to 2010.
- The current valuation: Latest data from the SPDR STI ETF show that it has a PE of 11.8.
- Cases of extreme valuations: A good instance of the market getting really expensive can be seen in 1973 when the PE reached 35. Meanwhile, the start of 2009 is a nice example of stocks becoming really cheap – the Straits Times Index was valued at just 6 times historical earnings.
With all the valuation numbers seen above, a reasonable takeaway – in my opinion at least – is that stocks in Singapore are cheaper than average at the moment. But, it’s also clear that we’re nowhere close to fire-sale bargain territory.
Another way to find value
The second method I use to survey the state of the market in Singapore is to determine the number of net-net stocks there are.
A net-net stock is one whose market capitalisation is lower than its net current asset value (current assets minus total liabilities). It is a great bargain theoretically. That’s because investors can get a discount on the company’s current assets (assets such as cash and inventory) net of all liabilities. Furthermore, the company’s fixed assets (assets such as properties and equipment with long lifespans) are thrown in for free.
So logically, if net-net stocks start appearing in large quantities in the market, stocks in Singapore should be really cheap.
The following chart traces the evolution of the net-net stock count in Singapore since the start of 2005:
Source: S&P Global Market Intelligence
It also shows that there are 137 net-net stocks as of 30 June 2016. I’d like to compare the current climate with two particular episodes that are shown in the chart.
The first is the second-half of 2007, when the Straits Times Index had peaked during the Great Financial Crisis and when there were less than 50 net-net stocks. The second episode is the first-half of 2009, when the index had bottomed-out during the crisis and nearly 200 net-net stocks sprang up.
The 137 net-net stocks we have right now sits comfortably between the two aforementioned extremes and is actually near the highest the net-net stock count has been since the second-half of 2009. As such, I think it’s fair to say that – based on this measure – stocks in Singapore are not dirt-cheap but they are still closer to the cheap-end of the cheap-to-expensive spectrum.
A Fool’s take
We’ve gone through two different approaches to value stocks and both point to similar conclusions: Singapore’s stock market, while cheap, is not super cheap.
But, this still sounds good to me as a long-term investor. I had stressed the phrase “long-term” for an important reason: The valuation of stocks have very little bearing on how they’d perform over the short run. It’s only over long time-horizons that valuations have a big say on how stocks would perform.
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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.