Are Singapore’s Stocks Headed for a Crash?
Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), hit a 52-week high of around 3,400 points in late April this year, before falling to around 3,100 points in late May, and then rebounding to over 3,300 today. With geopolitical and macroeconomic uncertainties looming in the background, is this a dead-cat bounce, or do investors have to brace for an impending crash?
It’s only clear in hindsight
Predicting short-term market tops is a tough business, and one that hardly anybody can get right with any consistency.
In the US, there are “market strategists” who work at large and important financial institutions. One of the high-profile things these strategists do near the end of a year is to come up with a forecast for what the US stock market would do in the next year. Theiraverage forecast for 2008 was for the S&P 500 to make a gain of over 10%. 2008, as some of you may know, was the year when the Great Financial Crisis erupted… and the S&P 500 ended up falling by nearly 40% in the year.
Source: Morgan Housel
In fact, former Fool Morgan Housel once compared the strategists’ forecasts with the S&P 500’s actual performance from 2000 to 2014 and found that the forecasts were off by an average of 14.7 percentage points per year for that period. Even a simple guess that the S&P 500 would increase by 9% each year (a figure close to the S&P 500’s long-run annual gain) over the same period would have been off by a better margin of 14.1 percentage points per year on average. Morgan’s study is shown in the chart above.
So if predicting short-term movements in the stock market is a fool’s errand, what can we as investors do? We can try to understand the stock market’s value. One useful metric to determine the value of the market is the cyclically-adjusted price-to-earnings ratio, or CAPE ratio. The ratio, which was popularised by the Nobel Prize-winning economist Robert Shiller, divides a stock’s price by the average of its 10-year inflation-adjusted earnings.
(As a side-note, a similar ratio was also used by the legendary investor Ben Graham decades ago; Graham’s version used a stock’s 10-year average earnings without adjusting for inflation.)
According to British banking juggernaut, Barclays, Singapore’s stocks (as represented by a broad-based Singapore-focused index maintained by MSCI) had a CAPE ratio of 16.9 as of 30 April 2019. If I use the Straits Times Index as a close substitute for the aforementioned MSCI index (a reasonable assumption to make, in my view), then Singapore’s stocks had declined by 3% from 30 April 2019 to 26 June 2019. If we further assume that the earnings of Singapore’s stocks had not changed in that period (which is another reasonable assumption), it means that the CAPE ratio for the local stock market was around 16 as of 26 June 2019.
Over the period from January 1982 to April 2019, Singapore’s stock market has had an average CAPE ratio of 22.8, which is higher than the current CAPE ratio of 16. These CAPE ratios point to an important takeaway for me: The valuation of Singapore’s stock market appears undemanding.
Another valuation approach results in a similar conclusion. What’s needed in this approach is to determine the number of net-net stocks that are available in the market. A net-net stock is defined as one with a market capitalisation that is lower than the value of its current assets (assets that already are or can easily be converted to cash) less all liabilities. Such a stock is a great bargain in theory, because investors can get a discount on the company’s current assets net of all its liabilities; what’s more, the company’s fixed assets (assets such as factories, land, properties, long-lived equipment, and more) are thrown into the mix for free.
The logic follows that if a large number of net-net stocks can be found at any point in time, then the market would likely be really cheap at that moment. Here’s a chart showing how the net-net stock count in Singapore’s market has changed 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 14 June 2019, there were 106 net-net stocks in Singapore. This sits comfortably between the net-net stock count’s high and low points since 2005, which lends strength to my view that Singapore’s stocks are not carrying high valuations.
The good news with playing the long game
The data show that our chances of success increases if we buy stocks when they’re cheap and hold them for a long time. It’s important to keep in mind that valuations tell us very little about what stocks would do over the short run. Valuations only have some form of predictive power on the movement of stocks over long time horizons. So, having decent valuations right now does not mean that Singapore’s stocks won’t fall over the short-term. In fact, a crash may be just around the corner!
But as I’ve just explained, the Singapore stock market has a reasonable valuation now, which puts the odds of long-term investing success firmly in our favour.
Correction (28 June 2019): A previous version of this article erroneously stated that a net-net stock is defined as one with a market capitalisation that is higher than the value of its current assets less all liabilities. The mistake has been corrected.