How cheap is the Singapore market?

Published January 9, 2012

By TEH HOOI LING
SENIOR CORRESPONDENT

HOW cheap is the Singapore market now?

Based on equity risk premium (ERP) - a measure of the expected return of an equity investor over and above the risk free rate - the market is at its cheapest since 1999, with the exception of the period during the global financial crisis in 2008/9 (See chart 1).

The ERP is calculated by using the earnings yield (the inverse of price-earnings ratio) minus the one-year interbank rate as a proxy for ERP. The higher the ERP, the higher the expected return for holding equities.

However, if we take the past 10 years' average PE to calculate the ERP, then we are at our absolute cheapest since 1999 (Chart 1).

In terms of forecast PE for next year, we are in mid-range. However, if we look at historical PE, there appears to be significant value in the market (Chart 2). Similarly when it comes to dividend yield and price-to-book ratios (Chart 3).

So overall, the various metrics suggest that we should be putting some new money to work in the market, but not to the extent of using up all of one's cash. It is still advisable keep some powder dry. In Jeremy Grantham, one of Wall Street's shrewdest strategist's words: 'Responding to the ebbs and flows of major cycles and saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk.'

Meanwhile, I've also generated lists of stocks with the highest dividend yield, the lowest price-earnings ratios, the lowest price-to-book ratios and the highest dividend coupled with the lowest price-to-book ratios.

These are metrics that usually indicate value in a stock. I've limited the lists to stocks with market capitalisation of $50 million and above. Data are from Bloomberg.