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. There are two methods I 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. In our context in Singapore, the market can be represented by the Straits Times Index (SGX:…
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.
There are two methods I 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.
In our context in Singapore, the market can be represented by the Straits Times Index (SGX: ^STI). Although it’s hard to get data on the index’s recent PE ratios, 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 31 May 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 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 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 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 at a certain point in time, then stocks would likely be really cheap at that moment.
Here’s a chart showing how the net-net stock count in Singapore has evolved since the start of 2005:
Source: S&P Global Market Intelligence
Two things are worth noting 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 31 May 2017, there are 96 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 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
We’ve walked through two ways to assess the collective values of Singapore’s stocks, and they both point to a similar conclusion: Stocks here are not deep bargains, but valuations are clearly not demanding too.
As a long-term investor, this sounds like music to my ears.
(In case you’re 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 investing newsletter, Take Stock Singapore. It can help you grow your wealth in the years ahead. So, come sign up here.
The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to follow our latest news and articles.
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.