The State Of Singapore’s Stocks Right Now: Are They Expensive Or Cheap?

Credit: Simon Cunningham

Toady’s the start of a brand new month.

I have a habit of looking at how cheap or expensive stocks in Singapore are at the start of each month and I do this for a good reason: Knowing where we are can give us important and useful investing perspective. Howard Marks, an incredibly wise investor, once said: “We may never know where we’re going, but we’d better have a good idea where we are.”

One view on value

In this exercise, I use two different ways to look at the value of stocks in Singapore. The first is simpler and involves a comparison of the market’s current valuation with the long-term average.

In our local context, the ‘market’ can be represented by the Straits Times Index (SGX: ^STI). Data on the fundamentals of the SPDR STI ETF (SGX: ES3) can also be a good proxy for those of the index. That’s because the SPDR STI ETF is an exchange-traded fund that mimics the Straits Times Index.

The following are the valuation numbers I’m interested in:

  • Long-term average: The Straits Times Index has had an average price-to-earnings (PE) ratio of 16.9 for the 37 years from 1973 to 2010.
  • Current valuation: The SPDR STI ETF has a PE ratio of 12 as of 31 July 2016.
  • Instances when extreme valuations appeared: 1973 is a good example of a year with high valuations as the Straits Times Index’s PE reached 35. The start of 2009 is a case of the market being really cheap as the historical PE fell to just 6.

Given the numbers we’ve seen, I think it’s reasonable to conclude that stocks in Singapore are cheaper than average at the moment. That said, it’s clear too that we’re not close to crazy-cheap territory.

Another view on value

The next method I use to gauge the value of stocks in Singapore is to count the number of net-net stocks there are in the market.

A net-net stock is a stock with a market capitalisation that is lower than its net current asset value. Mathematically, the net current asset value is given by this equation:

Net current asset value = Total current assets minus total liabilities

In theory, a net-net stock is a great bargain. That’s because investors are able to get a discount on the company’s current assets (assets such as cash and inventory) net of all liabilities. Moreover, the company’s fixed long-term assets (assets such as properties, factories, long-lived equipment etc.) are thrown into the mix for free.

So, the logic follows that if there are a large number of net-net stocks around in Singapore, then the market is likely to be really cheap.

Here’s a chart showing how the net-net stock count in Singapore has changed since the start of 2005:

Number of net-net shares in each quarter starting from 2005 (July 2016)
Source: S&P Global Market Intelligence

There are two things I want to point out with the chart. First, the number of net-net stocks reached a low of less than 50 in the second-half of 2007; that’s also the time when the Straits Times Index peaked during the Great Financial Crisis. Second, the number of net-net stocks nearly hit 200 in the second-half of 2009; that was the time when the Straits Times Index reached a bottom during the crisis.

As of 31 July 2016, there are 140 net-net stocks. This count of 140 sits between the two extremes seen in the past decade and is also near the highest it has been since the second-half of 2009. These lead me to think that stocks in Singapore are closer to the cheap-end on the cheap-to-expensive spectrum.

A Fool’s take

I’ve shared two different methods to value the stock market in Singapore and both give similar takeaways: Stocks in Singapore are cheap, though not dirt-cheap.

As a long-term investor, this sounds like music to my ears. Now, I had emphasised the phrase “long-term” for a very good reason. Valuations tell us very little about what stocks will do over the short-term. It’s only over long time horizons that valuations start becoming important.

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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.