BT: S'pore market not cheaper despite low stock valuations (05 Jul 2006)

S'pore market not cheaper despite low stock valuations

Study shows the bourse carries higher risk premium post-2000

By WONG WEI KONG

SINGAPORE stocks may be trading at valuations lower than historical figures, but that does not necessarily mean that the market has become cheaper.

While it is quite a common practice for investors to look at the fair price-earnings (PE) ratio of the market using the historical valuation range, this could be misleading as the historical PE band could have shifted, according to a study by UOB Kay Hian.

Based on the findings of the study, UOB Kay Hian said market players have implicitly accorded a higher risk rating on Singapore equities in the post-2000 period. 'The main guiding parameter is in the higher equity risk premium (ERP) of the market in the post-2000 period vs the pre-2000 period,' it said.

The higher risk rating could be attributed to the maturity of listed Singapore companies now seeking new growth avenues by expanding their exposure to the overseas markets where risks are normally higher.

Among the stocks which saw risk premiums rated upwards since as far back as 1997 are Keppel Corp, Keppel Land, OCBC, Neptune Orient Lines and SingTel. Stocks which have a shorter history were not included in the study.

Based on the risk premiums accorded to the market, the trading range in PE terms could now have shifted to between 10 times and 14 times from between 16 times and 25 times previously. 'Hence, it would be quite misleading to talk about the market being cheap from a historical perspective,' said UOB Kay Hian, Singapore's largest broking house. 'Because of this, we believe the next historic low for the Straits Times Index could be at a PE of as low as 10 times.'

The bull run in Singapore stocks was brought to a halt in late April, when worries about US inflation and interest rates sparked off a period of sharp sell-offs. While the market is less volatile now, sentiment is still uncertain. Market players expect the relief following less hawkish comments on inflation late last month by US Federal Reserve chairman Ben Bernanke to be punctuated by nervous trading as investors keep their eye on the US economy.

There are fears that a sharp slowdown is under way in the United States, amid signs of weakening consumer confidence and spending.

UOB Kay Hian said it still sees downside risks and said investors should buy only on a pullback. 'We advocate a more defensive posture, preferring stocks with lower betas, supported by good dividend yields on market dips,' it said.

Some defensive plays with good yields are Singapore Post, Hong Leong Finance, Singapore Press Holdings, SIA Engineering and SMRT, it added.

The Straits Times Index closed up 10.47 points at 2,448.73 yesterday.

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.