Are Stocks In Singapore Expensive Or Cheap Right Now?

I have a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month. This habit was developed for a good reason. Howard Marks, a great investor and brilliant investment thinker, 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 in the market can provide useful investing insights. There are two methods I like to employ to gauge the value of stocks in Singapore’s market.

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 13 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 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.

Here’s a chart showing 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
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 31 January 2017, there are 121 net-net stocks. This sits comfortably between the net-net stock count’s peak-and-trough seen since the start of 2005. Given this, I think it’s fair to say that stocks in Singapore are closer to being cheap than expensive at the moment.

A Fool’s take

We’ve seen two approaches for assessing how cheap or expensive Singapore’s stocks are and they both point to roughly the same conclusion: Stocks have valuations that are not demanding at all, although they are clearly not at dirt-cheap levels yet.

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.