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Is The Singapore Stock Market Expensive Or Cheap Right Now?

Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), ended April at 3,175 points. That was a whisker away from the 52-week high of 3,188 back then. With this as a backdrop, many of you may be wondering if stocks in Singapore are cheap or expensive right now.

There are two methods I like to use to determine the state of the market.

The first way to determine value

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

It’s hard to get data on the Straits Times Index’s recent PE ratios, but a useful and adequate 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.

As of 30 April 2017, the SPDR STI ETF has a PE ratio of 13.1. Here are some of the other important PE ratios I need:

1. The long-term average PE ratio: The Straits Times Index’s average PE ratio from 1973 to 2010 was 16.9

2. An instance of a high PE ratio for the Straits Times Index: Back in 1973, the index’s PE ratio hit 35

3. An instance of a low PE ratio for the Straits Times Index: At the start of 2009, the index was valued at just 6 times trailing earnings

Based on all the PE ratios above, I think it’s fair to say that stocks in Singapore are cheaper than average at the moment. But, it’s worth noting that we’re also far from being in fire-sale bargain territory.

The second way to determine value

This is more complex. What’s needed 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’s lower than its net current asset value. The net current value is a simple financial number that can be calculated with some numbers from a company’s balance sheet based on the following formula:

Net current asset value = Total current assets minus total liabilities

In theory, 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, inventory, and more) net of all its liabilities. Furthermore, the company’s fixed assets (assets such as land, properties, factories etc.) are thrown in for free.

The logic thus follows that if a large number of net-net stocks can be found at any point in time, then the market would likely be really cheap at that moment.

The chart below shows how the net-net stock count in Singapore’s market 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 stock count fall to a low of less than 50 for the time period we’re observing; the second-half of 2007 was also when the Straits Times Index reached a peak prior to the Great Financial Crisis. Secondly, the first-half of 2009 was when the net-net stock count hit a high of nearly 200; that time period was also when the Straits Times Index had reached its trough during the crisis.

As of 30 April 2017, there are 96 net-net stocks in Singapore. This is in the middle of the net-net stock count’s high and low points since 2005. Given this, I think it’s very reasonable to say that stocks in Singapore are not close to being expensive at all. This being said, I think we should also note that the net-net stock count has been sliding since the second quarter of 2016.

A Foolish conclusion

The two approaches we’ve walked through to assess the value of stocks in Singapore point to a similar conclusion: Stocks here are not crazy bargains, but valuations are not demanding too.

As a long-term investor, this sounds like music to my ears.

(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.)

A version of this article first appeared in Take Stock Singapore, the Motley Fool Singapore’s  free investing newsletter.

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.