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Are Singapore Shares in Bargain Territory Right Now?

So far this year, the Singapore stock market benchmark, the Straits Times Index (SGX: ^STI), has risen around 5% to close at 3,223 on 14 June 2019. However, the index did not go up on a straight line; it had a volatile ride up, especially with escalating trade tensions between the US and China. Investors who are looking to invest in the Singapore stock market right now might be wondering if shares, in general, are still undervalued.

There are two methods to determine if Singapore shares are undervalued. The first way is to compare the market’s current price-to-earnings (PE) ratio to the market’s long-term average PE ratio. The second approach involves looking at the number of net-net stocks in the stock market.

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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 tracks the fundamentals of the Straits Times Index.

As of 14 June 2019, the SPDR STI ETF had a PE ratio of 11.4. Here are some of the other important 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 example 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, we can see that Singapore stocks are cheaper than average right now.

Net-net stocks method

In this method, we will look at the number of net-net stocks available in the local stock market. To know what a net-net stock is, you can head to the explanation here. The theory goes that if there is a large 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. In the second half of 2007, the net-net stock count was below 50 while in the first half of 2009, the figure was at the peak of almost 200.

As of 14 June 2019, there were 106 net-net stocks. This is comfortably between the net-net stock count’s peak-and-trough from 2005 till today.

The Foolish conclusion

Based on the two different valuation methods, we can safely say that shares in Singapore are not extremely expensive, but they not in extreme bargain territory either.

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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.