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Are Singapore’s Stocks Cheap Or Expensive Currently?

I have a habit of taking the pulse of the market at the start of every month. I developed this habit for a good reason – knowing where we stand in terms of how expensive or cheap stocks are can provide useful cues on how we should be investing.

There are two methods I like to use to figure out the value of stocks in Singapore’s stock market.

The first way to determine value

The first method is relatively simple and it 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 current 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 a list of 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 13.2 right now
  • An instance when the Straits Times Index had a high PE ratio: That would be 1973, when the index’s PE ratio hit 35
  • An instance when the Straits Times Index had a low PE ratio: That would be the start of 2009, when the index’s PE was just 6

Given the numbers above, I think it’s fair to say that stocks in Singapore – based on the PE ratio – are cheaper than average at the moment. But, we’re also clearly not anywhere close to deep bargain territory just yet.

The second way to determine value

The second method I use is to determine the number of net-net stocks that are available in the market.

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 would likely be really cheap at that point in time.

Here’s a chart showing how the net-net stock count in Singapore has evolved since the start of 2005:

Number of net-net stocks in each quarter starting from 2005 (February 2017)
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 28 February 2017, there are 108 net-net stocks. This is comfortably between the net-net stock count’s aforementioned peak-and-trough seen from 2005 to today. Given this, I think a fair takeaway would be that stocks in Singapore are not anywhere near being expensive at the moment. But, the net-net stock count has also clearly been falling since the second quarter of 2016, so stocks do appear to be getting relatively pricier.

A Foolish conclusion

We’ve walked through two approaches for assessing the state of Singapore’s stock market and they both point to similar conclusions: Stocks here are not deep bargains, but valuations are also not at demanding levels at all.

As a long-term investor, this sounds good to me.

(For those wondering, 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.