The State Of The Market Now: Are Stocks In Singapore Expensive Or Cheap?

It’s the last day of September today. I have a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month. But since the first day of October is a Saturday, I thought now’s a good time as well for my monthly exercise.

I developed this habit of mine for a good reason. The great investor Howard Marks once said, “We may never know where we’re going, but we’d better have a good idea where we are.” Getting a feel for the state of the market can provide useful investing perspectives.

One way to find value

There are two methods I like to employ to try and gauge the value of the market. The first is simpler and involves a comparison of the market’s current valuation with the valuation metric’s long-term average figure.

In Singapore’s context, the market can be represented by the Straits Times Index (SGX: ^STI). When it comes to the index’s valuation, a good proxy can be found from the valuation numbers for the SPDR STI ETF (SGX: ES3); the SPDR STI ETF is an exchange-traded fund that mimics the fundamentals of the Straits Times Index.

Here are the important valuation numbers I need:

  • The long-term average: The Straits Times Index had an average price-to-earnings (PE) ratio of 16.9 from 1973 to 2010
  • The current valuation: The SPDR STI ETF has a PE ratio of 12 right now
  • An instance when the market became pricey: That would be 1973, when the Straits Times Index had a PE of 35
  • An instance when the market became cheap: That would be the start of 2009, when the Straits Times Index’s historical PE dropped to just 6

Given the numbers we’ve seen, I think it’s fair to say that stocks in Singapore are actually cheaper than average right now, based on the PE ratio. But, it’s worth noting that we’re not in dirt-cheap territory just yet.

Another way to find value

The other method I use is to determine 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 if a large number of net-net stocks can be found in the market, then stocks in Singapore would likely be cheap.

In the following chart, you can see how Singapore’s net-net stock count has changed since the start of 2005:

Source: S&P Global Market Intelligence

There are two timeframes to note in the chart. The first is the second-half of 2007, when the net-net stock count fell to less than 50. The second is the first-half of 2009, when the net-net stock count surged to nearly 200. Those of you who are familiar with market history may realise that the two periods coincide with the Straits Times Index’s high point (second-half of 2007) and low point (first-half of 2009) during the Great Financial Crisis.

As of 29 September 2016, there are 126 net-net stocks. This sits comfortably between the net-net stock count’s peak and trough. Given this, I think it makes sense to conclude that stocks are nowhere near being crazy expensive or crazy cheap.

Another thing worth mentioning is that the net-net stock count is currently near the highest it has been since the first-half of 2009. So, it could also be fair to say that stocks are perhaps cheaper than average.

A Fool’s take

The two different methods we’ve seen above to gauge the market’s value have produced similar takeaways: Stocks in Singapore are cheap, but not dirt-cheap.

As a long-term investor, this sounds good to me. Now, I had stressed the phrase “long-term” for a good reason: Valuations tell us very little about what stocks would do over short time frames; valuations are useful only at 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.