Someone asked me the other day why investors continue to pile into the US stock market even though it is already quite highly priced. What’s more, much cheaper alternatives are available elsewhere, such as in Asia.
Currently, the US stock market, as represented by the Dow Jones Industrial Average, sports a dividend yield of 1.9 per cent, which is quite measly. It is also valued at 24 times earnings, which is quite high. In other words, if US companies pay out all their profits as dividends, the hypothetical earnings yield would be 4.1 per cent.
That is not especially attractive. Currently, the risk-free rate as measured by US 10-year Treasuries is 3.6 per cent. So the difference between the earnings yield and the risk-free rate is slim. That difference could narrow further. After all, the US economy is showing signs of slowing, which could have an adverse impact on corporate earnings. Consequently, the earnings yield could creep even lower, if share prices stay elevated.
But despite the expensive valuation of US shares, trading is still brisk. Additionally, every time the market falls, it seems to rebound almost immediately. Investors appear to treat any market decline as just another buying opportunity. Consequently, the Dow continually hovers around its all-time high of around 41,000.
Global slowdown
No one really knows why investors are prepared to pay so much for US shares. Part of the reason may lie in the swathe of almost unmatched fast-growing US technology stocks. This means investors who seek faster capital growth have little option but to trawl through the US tech sector for investing opportunities.
However, the tech-heavy Nasdaq is even less attractively valued than the Dow. Its earnings yield is just 3.1 per cent, and the dividend yield is 1.1 per cent.
But given the likely slowdown in global economies, and the concerted efforts by central banks to fight this by lowering interest rates, now might be an opportune time to look for more attractive markets closer to home.
That is not to say that companies in the region can avoid an earnings downturn. However, looking for markets with a healthy margin of safety is never a bad idea.
Malaysian investors, on the surface at least, seem to be slightly more circumspect over high valuations. In Malaysia, investors are currently paying about RM16 (S$4.84) for every ringgit of profit that companies make. The price-to-earnings (PE) ratio of the Kuala Lumpur Composite Index (KLCI) is one of the lowest in South-east Asia, though the Stock Exchange of Thailand at 14.5 times earnings is modestly cheaper. Thailand-listed companies’ dividend yield of 3.3 per cent is only marginally lower than the KLCI’s 3.8 per cent.
Asean opportunities
The Jakarta Composite Index, with a PE ratio of 14, is ostensibly cheap, too. Its dividend yield is an attractive 3.7 per cent. Both Vietnam and the Philippines also offer reasonable value for money. The shares on the Hanoi Stock Exchange are valued at 14.8 times earnings, while the shares on the Philippine Stock Exchange sport a PE ratio of 12.4. The dividend yields on the two exchanges are 3.8 per cent and 2.2 per cent, respectively.
However, of all the major exchanges in South-east Asia, Singapore is the most attractively valued. Investors there are paying on average just S$12 for every dollar of profit that Singapore companies make. They also get to participate in a share of those companies’ profits, with a yield of 5.1 per cent on average.
The surprisingly high dividend yield is perhaps a quirk of Singapore’s Straits Times Index. Of the 30 companies that make up the benchmark index, seven are real estate investment trusts (Reits). These companies are required to pay out at least 90 per cent of their earnings as distributions to unitholders.
Reits could attract the attention of investors given that their performance tends to be inversely correlated to interest rates. Their reliable payout could be in demand as central banks cut interest rates to head off an economic slowdown.
We should be so lucky
Singapore investors should consider themselves lucky to have such a large selection of high-yielding shares to choose from right at their doorstep, at a time when interest rates are set to head lower.
Admittedly, Singapore shares were unloved when growth at any cost was the order of the day. The downside of the Singapore market was its lack of fast-growing high-technology shares. But the upside now could be thanks to its lack of such shares.
The upshot is that, as investors, we should try to understand and, better still, try to appreciate the different characteristics of the markets that we invest in. Not all markets are the same. Therefore, Singapore shares can and should play an important role in a well-balanced portfolio that many other markets can’t.
Just as we wouldn’t make an appointment with an optician to get a knee operation, we don’t necessarily look to Singapore for market-beating high-tech growth shares. Instead, we look for an outstanding orthopaedic surgeon. I should know. I have just had knee arthroplasty and life couldn’t be better.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: David Kuo does not own shares in any of the companies mentioned.
