Singapore stock market's valuations in the first year of rebound from a recession trough

I prefer to use P/B as a guide instead of PE because the latter could be significantly distorted by earnings forecast downgrades. Earnings downgrades are done much faster, with a stroke of the pen by analysts while book values are more resilient.

During the Asian Financial Crisis (AFC), the Straits Times Index's (FSSTI) P/B troughed at 0.70x in early-Sep 98. By early-Jan 99 (4 months later), the index had doubled with its P/B at 1.40x. After a 3-month breather, the market continued its uptrend to a P/B of 2.40x by end-99. In a span of 15 months, the FSSTI more than trebled. The FSSTI's NAV deteriorated by a mere 11% during this period.

This time round, the FSSTI troughed at 0.89x P/B in early March. It has since rallied to 1.29x P/B (based on yesterday's FSSTI of 2074.4). If the FSSTI can reach 1.40x P/B in the near term, same as AFC scenario, this would imply 6% upside from here (current FSSTI: 2,166.97) or a FSSTI target of circa 2300.

The FSSTI's long-term P/B mean is 1.76x (1993-2009). This implies a long-term fair level circa 2830. While there is still some 30% upside to long-term mean valuation, we expect the market to take a breather - to assess macro-economic data points before the next leg up. Investors should lock in some gains and re-enter at lower price levels. The consensus economic outlook remains a U-shaped recovery instead of a V-shaped recovery.

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