We’re very close to the end of 2016. It’s the time of the year when I’m pretty sure plenty of investors out there would be wondering what the Singapore stock market has in store for them in 2017. But, to invest for the year ahead and beyond, thinking about the future is not the most important thing we should be doing – the present is where our thoughts should be. As the great investor Howard Marks once said: “The most important thing to do is to assess not the future but the present. Awareness and understanding of cycles is…
We’re very close to the end of 2016. It’s the time of the year when I’m pretty sure plenty of investors out there would be wondering what the Singapore stock market has in store for them in 2017.
But, to invest for the year ahead and beyond, thinking about the future is not the most important thing we should be doing – the present is where our thoughts should be. As the great investor Howard Marks once said:
“The most important thing to do is to assess not the future but the present. Awareness and understanding of cycles is an essential tool for investment survival. That’s why I always say: “We may never know where we’re going, but we’d better have a good idea where we are.””
So, where are we now when it comes to the value of stocks in Singapore? There are two ways that I like to look at the issue.
One way to find value
The first way is simpler and involves a comparison of the market’s current price-to-earnings (PE) ratio with the valuation metric’s long-term average number.
In Singapore’s context, the market can be represented by the Straits Times Index (SGX: STI). As for the index’s PE ratio, a good proxy can be found from the PE ratio of the SPDR STI ETF (SGX: ES3). That’s because the SPDR STI ETF is an exchange-traded fund that mimics the fundamentals of the Straits Times Index.
Here are all the important PE ratios I need:
- The long-term average: From 1973 to 2010, the Straits Times Index had an average PE of 16.9
- The current valuation: The SPDR STI ETF has a PE ratio of 12 right now
- An instance when the Straits Times Index carried a high PE ratio: That would be 1973, when the index’s PE ratio climbed to 35
- An instance when the Straits Times Index had a low PE ratio: That would be the start of 2009, when the index’s historical PE dropped to just 6
With all the numbers we’ve seen above, I think it’s fair to say that stocks in Singapore are currently cheaper than average at the moment. But, we’re also clearly not in dirt-cheap territory yet.
Another way to find value
The other way I use to gauge the value of stocks in Singapore 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 chart below, you can observe how Singapore’s net-net stock count has changed since the start of 2005:
Source: S&P Global Market Intelligence
There are two things to note about the chart. Firstly, the second-half of 2007 saw the net-net count reach a low of less than 50; that was when the Straits Times Index had reached its peak prior to the global financial crisis. Secondly, the first-half of 2009 was when the net-net count peaked at nearly 200 for the timeframe under study; that was also roughly the time when the Straits Times Index reached its trough during the crisis.
As of 29 December 2016, there are 125 net-net stocks. This sits comfortably between the net-net stock count’s peak-and-trough seen over the 11-plus years. Given this, I think it’s fair to say that stocks appear to be closer to being cheap than expensive.
A Fool’s take
We’ve seen two approaches for assessing where we are at the moment and they both point to roughly the same conclusion: Stocks are clearly not extremely cheap, but valuations are not demanding at all.
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.
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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.