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The Current State Of Singapore’s Market: Are Stocks Cheap Or Expensive?

Photo credit: Rafael Matsunaga. Licence: http://creativecommons.org/licenses/by/2.0/

We’re at the start of December, which means it’s time for me to take a look at how cheap or expensive stocks are in Singapore.

I have a habit of looking at the state of the market at the start of every month. 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.”

Knowing where we stand when it comes to the market can provide useful investing insights.

One way to find value

I have two ways of gauging the value of stocks in Singapore. The first is simpler and involves a comparison of the market’s current price-to-earnings (PE) ratio 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 PE ratio, a good proxy can be found from the PE ratio of the SPDR STI ETF (SGX: ES3) itself. That is because the SPDR STI ETF is an exchange-traded fund that mimics the fundamentals of the Straits Times Index.

So, here are the important PE ratios I need:

  • The long-term average: The Straits Times Index had an average PE ratio of 16.9 from 1973 to 2010
  • The current valuation: The SPDR STI ETF has a PE ratio of 12 at the moment
  • An instance when the PE soared: That would be 1973, when the Straits Times Index had a PE of 35
  • An instance when the market had a low PE: 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 its 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 Singapore’s market, then stocks here 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:

number-of-net-net-stocks-in-each-quarter-starting-from-2005-nov-2016
Source: S&P Global Market Intelligence

There are two things to note about the chart. First, you can see that the net-net stock count reached a trough of less than 50 in the second-half of 2007; the Straits Times Index had reached its pre-Great Financial Crisis peak during that timeframe. Second, the net-net stock count surged to a high of nearly 200 in the first-half of 2009; that was also roughly the time when the Straits Times Index reached its trough during the crisis.

As of 30 November 2016, there are 124 net-net stocks. This sits comfortably between the net-net stock count’s peak-and-trough over the past 11 years. Given this, I think it makes sense to conclude that stocks in Singapore are nowhere near being crazy expensive as well as crazy cheap right now.

A Fool’s take

The two different ways I’ve used 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 is music to my ears. 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; their effects only become apparent 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.