The Singapore stock market benchmark, the Straits Times Index (SGX: ^STI), has tumbled 1.3% so far for the month. With such weakness surrounding the local stock market, investors might be thinking: “How cheap is the Singapore stock market right now?”
Knowing whether the stock market is cheap or expensive could help us make better investment decisions.
There are two methods to determine if Singapore shares are cheap right now. 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.
PE valuation method
Since it is difficult to get the past daily PE ratios of the STI, 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 STI.
As of 14 December 2018, the SPDR STI ETF had a PE ratio of 11.0. 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. 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.
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 December 2018, there were 112 net-net stocks. This is the highest level since the first quarter of 2017 but is still far from the net-net stock count seen in 2016.
The Foolish takeaway
Based on the two different valuation methods, we can safely say that stocks in Singapore are not that expensive, but they not in extreme bargain territory either.
$STI(^STI.IN) $STI ETF(ES3.SI)
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