The World Cup is over. And dreary investors should be coming back in droves to the stock market.
As mentioned in my earlier article, analysts had predicted that the Singapore stock market could take a breather when the World Cup is in progress. Trading activity usually slows down starting in May with the Straits Times Index (SGX: ^STI) falling an average of 8.6% in the two months between end-April and end-June in the previous six World Cup tournaments, before this year’s instalment.
Just as predicted, the Straits Times Index tumbled from a high of 3,614 on 30 April to 3,269 on 29 June, a drop of 9.5%. The index saw further falls from end-June to close at 3,233 yesterday, the first day after France won the 2018 World Cup.
The weakening Singapore stock market might make some investors wonder: How cheap is the local market right now? Knowing whether the stock market is cheap or expensive could help us make better investment decisions.
There are two ways to determine if Singapore stocks are cheap at the moment. The first method is to compare the market’s current price-to-earnings (PE) ratio to the market’s long-term average PE ratio. The second method involves looking at the number of net-net stocks in the stock market.
PE valuation method
Since it is difficult to get the past daily PE ratios of the Straits Times Index, the PE ratios of SPDR STI ETF (SGX: ES3) can be used as a proxy. The SPDR STI ETF is an exchange-traded fund (ETF) that mimics the performance of the STI.
As of 16 July 2018, the SPDR STI ETF had a PE ratio of 10.4. Here are some of the other essential PE ratios that we need:
1) The long-term average PE ratio: The STI’s average PE ratio from 1973 to 2010 was 16.9;
2) An instance of a high PE ratio for the STI: Back in 1973, the index’s PE ratio hit 35; and
3) An instance of a low PE ratio for the STI: At the start of 2009, the index was valued at 6 times trailing earnings.
Based on the data above, stocks in Singapore are cheaper than average now. The current PE ratio of 10.4 is also lower than the average of 11.6 seen in the past twelve months.
Net-net stocks method
In this method, we will look at the number of net-net stocks available in the local market. To know what a net-net stock is, you can check out the explanation here.
If there is a larger number of net-net stocks than usual in the stock market, it could mean that stocks are cheap at that moment.
The following is a chart that shows the net-net stock count in Singapore since 2005:
Source: S&P Global Market Intelligence
When the Straits Times Index is at a peak (such as in the second-half of 2007), the net-net stock count is low. The reverse is also true: When the Straits Times Index is at a low (like in the first-half of 2009), the net-net stock count is high.
As of 16 July 2018, there were 106 net-net stocks. This is comfortably between the net-net stock count’s peak-and-trough from 2005 till today. However, on a closer look, we can notice that the number of net-net stocks has been increasing of late. In fact, the latest figure of 106 is the highest since March 2017.
A Foolish takeaway
Stocks in Singapore look to have gotten cheaper in recent times with the falling Straits Times Index. However, investors should still look at the valuation of the companies they are interested in investing independently to determine if it makes sense for the price.
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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 contributor Sudhan P doesn’t own shares in any companies mentioned.