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Are Stocks In Singapore Cheap Or Expensive Right Now?

Knowing where things stand in the market is useful for providing cues on how we should be investing. That’s why I have a habit of looking at how cheap or expensive the stock market is at the start of every month.

As tomorrow is the first of April as well as a Saturday, I thought I would bring my study of the state of the market forward by a day.

There are two methods I use to determine how pricey Singapore’s stock market may be.

The first way to determine value

The first method is relatively simpler. It involves a comparison of the market’s current price-to-earnings (PE) ratio with the valuation metric’s long-term average figure.

In our context in Singapore, 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 in the PE ratio of the SPDR STI ETF (SGX: ES3). The SPDR STI ETF is an exchange-traded fund that mimics the fundamentals of the Straits Times Index.

The following is a list of the important PE ratios I need:

1) The long-term average: From 1973 to 2010, the Straits Times Index had an average PE ratio of 16.9

2) The current valuation: The SPDR STI ETF has a PE ratio of 13.1 currently

3) An example of a high PE ratio for the Straits Times Index: That would be 1973, when the index’s PE ratio hit 35

4) An example of a low PE ratio for the Straits Times Index: That would be the start of 2009, when the index’s PE ratio was just 6

Based on the numbers above, I think it’s very reasonable to say that stocks in Singapore are cheaper than average at the moment. But, we’re also far from being in deep-bargain territory.

The second way to determine value

My second method is to find out 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.

In the chart below, you can see 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 (March 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 30 March 2017, there are 95 net-net stocks. (For a list of some of the net-net stocks, head here.) This is in the middle of the net-net stock count’s peak and trough of nearly 200 and less than 50, respectively. Given this, I think it makes sense to conclude that stocks in Singapore are not close to being expensive at all. But, the net-net stock count has also been sliding since the second quarter of 2016, so that would be something to keep an eye on.

A Foolish conclusion

The two approaches we’ve walked through to assess values in Singapore’s stock market point to similar takeaways: Stocks here are not crazy bargains, but valuations are also clearly not demanding 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.