June 28, 2007

Is the equity market over value now?

DBS Vikers published a report yesterday, with a target for STI to be at 3750/4200 for 3 and 12 months respectively.
The question is whether is STI overvalue at this point in time.
If we look at the STI price/earnings ratio (P/E), it is currently at 14.61. If we were to take the reciprocal of this ratio, i.e., take 1 divide by 14.61, we get 6.84%. This is what we call the earning yield of the market. We subtract this from the 1 year S$ deposit rate of about 1.8%, we get 5.04%.
Historically, the spread of 5.04% is considerd to be cheap.
Based on this yardstick, I would say that the STI is not over strech. However, there can be correction along the way, and it also depends on the risk appetite of the investors and what happen to the US market.

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