Are Stocks In Singapore Expensive Or Cheap Right Now?

Today marks the start of September.

I’ve a habit of looking at how cheap or expensive Singapore’s stock market is at the start of every month. It’s an important and useful exercise. As investor Howard Marks once said, “We may never know where we’re going, but we’d better have a good idea where we are.”

One way to find value

When I’m trying to assess the value of stocks in Singapore, I use two methods. The first is simpler and involves a comparison of the market’s current valuation with its long-term average figure.

In the context of Singapore, the ‘market’ can be represented by the Straits Times Index (SGX: ^STI). In turn, the index’s fundamentals can be gauged from the SPDR STI ETF’s (SGX: ES3) own data. That’s because the SPDR STI ETF is an exchange-traded fund that aims to mimic the Straits Times Index.

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

  • The long-term average: From 1973 to 2010, the Straits Times Index has had an average price-to-earnings (PE) ratio of 16.9.
  • The current valuation: Right now, the SPDR STI ETF has a PE ratio of 11.9
  • Instances of high valuations: In 1973, the Straits Times Index had a PE of as high as 35
  • Instances of low valuations: At the start of 2009, the Straits Times Index’s historical PE dipped to just 6.

With all the valuation numbers above, I think it’s fair to conclude that stocks in Singapore are nowhere near being expensive and in fact, are cheaper than average. But, it’s also clear that we’re not in fire-sale bargain territory right now.

Another way to find value

The second method I use to assess the local stock market would be to find the number of net-net stocks that are available.

A net-net stock is a stock with a market capitalisation that is lower than its net current asset value. The net current asset value is a simple financial number that can be calculated with the following formula:

Net current asset value = Total current assets minus total liabilities

Theoretically, a net-net stock is a fantastic bargain. That’s because investors can get a discount on the company’s current assets (assets such as cash and inventory) net of all liabilities. Moreover, the company’s fixed assets (assets such as properties, factories, and equipment etc.) are thrown into the fray for free.

The logic follows that the Singapore stock market is likely to be cheap if net-net stocks start appearing in large quantities.

In the chart below, you can observe how the net-net stock count in Singapore has changed since the start of 2005:

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

I’d like to point out two noteworthy things about the chart. First, the number of net-net stocks had fallen to less than 50 during the second-half of 2007; that’s also when the Straits Times Index had peaked before the Great Financial Crisis truly erupted. Second, the net-net stock count had surged to nearly 200 during the first-half of 2009; that’s when the Straits Times Index had bottomed-out in the crisis.

You can see that there are 130 net-net stocks as of 31 August 2016. This number sits snugly between what was found in the second-half of 2007 and the first-half of 2009. It leads me to think that stocks in Singapore are clearly not anywhere close to being expensive.

In addition, the net-net stock count is currently near the highest it has been over the decade-plus period I had studied. On the cheap-to-expensive spectrum, I thus think it’s fair to say that stocks in Singapore are likely to be closer to the cheap-end than to the other extreme.

A Fool’s take

The two different ways I’ve used to gauge the market’s value have both given similar conclusions: Stocks in Singapore are cheap, but not dirt-cheap.

This sounds good to me as a long-term investor. In case you’re wondering why I had emphasised the phrase ‘long-term,’ there’s a good reason: Valuations tell us very little about what stocks would do over the short-term and only start pulling their weight over long time horizons.

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.