Value indicators for the Singapore stock market look good
19 July 2001
Yesterday, the Straits Times Index fell 10.96 points to 1627.82, its 11th loss in 13 days. This is just over 60 points -- and less than 4 percent -- above its lowest daily close this year of 1566.73.
The market has clearly been spooked by the poor trade data reported for June, which showed a year-on-year decline in non-oil domestic exports of 16.9 percent. Government and private economists now believe that the Singapore economy is likely to show very little growth -- if not an outright decline -- for 2001. The economy is not expected to recover until the fourth quarter of this year or even later. As a result, investors seem to be giving up hope of an early rebound in the stock market.
The problem, of course, is that one never knows exactly when the market will bottom. Very often, the stock market bottoms when the economic environment is still extremely gloomy. Therefore, the fact that the news in the economic front is currently unfavourable actually gives very little clue as to the direction of the market.
Long-term investors might be better off concentrating on the attractive valuations available in the Singapore stock market rather than the short-term direction of the economy. The Straits Times Index is currently trading at a P/E ratio of less than 12 and a dividend yield of more than 2.7 percent. The latter is higher than fixed deposit interest rates. A quarter of the STI component stocks are trading at single-digit P/E ratios. In contrast, the S&P 500 is trading at a P/E ratio of over 26 and a dividend yield of less than 1.3 percent. In other words, the Singapore stock market is being valued at half the capitalisation rate of the US market.
A cheap market is not a guarantee of an imminent rebound. But then, in stock investment, looking for guarantees, especially over the short term, is somewhat of a fruitless exercise. Given time and patience, however, investing in the Singapore stock market now and holding for the next few years is likely to prove highly profitable.
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