On Tuesday this week, the Straits Times Index (SGX: ^STI) hit a one-and-a-half year low, closing at 3,109,9. The stock market has slightly recovered since then to around 3,156 at the time of writing. However, it is still down more than 12% since its peak seen in early-May this year.
With the weakness still prevailing in the local stock market, investors might be wondering how cheap it is right now. Knowing whether the stock market is cheap or expensive can help us make better investment decisions.
There are two methods to determine if Singapore stocks are cheap 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 13 September 2018, the SPDR STI ETF had a PE ratio of 10.9. 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, we can see that Singapore stocks are cheaper than average currently.
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 check out 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.
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 a peak of almost 200.
As of 13 September 2018, there were 105 net-net stocks. This sits comfortably between the net-net stock count’s peak-and-trough from 2005 till today.
The Foolish takeaway
Based on the two different methods, we can conclude that stocks in Singapore are not that expensive, but they not extremely cheap either.
Having said that, investors should still look at the valuation of individual companies independently to determine if it makes sense for the price before investing in them.
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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.