Dr Wealth

Does the “undervalued effect” work in Singapore?

Christopher Ng
Christopher Ng

The difference between the returns of stocks with a low Price to Book ratio and those with a high PB ratio was one of the three factors use in Eugene Fama and Kenneth French’s Three-Factor Model that was made in 1993.

The idea is that buying stocks which are undervalued would outperform those with a higher PB ratio as they are cheaper and allow an investor the opportunity of engaging in some bargain hunting. This is also called the “value effect”.

We did another simple test using the Bloomberg back-testing tool on the Singapore Markets.

In this test, we compared the performance of an equally-weighted portfolio of stocks against half the number of stocks with a lower PB ratio. Just like the last exercise on market capitalization, back-tests were done over the following periods:

  • 10 years – Corresponding to the decade after the Great Recession. This is, generally speaking, a bullish period.
  • 5 years – Corresponding approximately to the period where markets experienced the taper tantrum. This is a marginally bearish or sideways market.
  • 3-years – Corresponding to the first three years of the Trump Presidency. This is, generally speaking, a bullish period.

Singapore Blue-chips

For Singapore blue-chips, we suspected that cheaper companies tend to do better because there is a greater upside when we own cheaper stocks. As such, we tested the strategy of holding 15 of the cheapest blue-chip counters against an equal-weighted portfolio of all 30 STI stocks. Our results are as follows in November 2019:

Returns 3 Years 5 Years 10 Years
30 Equal-weighted stocks 7.06% 0.77% 6.61%
15 lowest P/B stocks 9.94% 0.36% 6.64%

The latest bullish years under Trump, the stocks with the lowest P/B ratios did indeed outperform the rest of the index but when we expanded the backtest, it actually underperformed during the taper tantrum period.

Stretching it back further to 10 years resulted in a similar performance to an equally weighted portfolio. It is possible that the low P/B blue-chips strategy would tend to do better during bullish market periods.

The disappointing aspect of this exercise was not the returns, but that choosing a low PB blue-chip strategy resulted in volatility that is around 5-10% higher for blue-chips.

This means that you may have to go beyond cheapness when selecting the blue-chip counters like Hong Kong Land for your portfolio.


If you invest based on common sense, you would conclude that REITs with a lower-Price to Net Asset Value proxied by P/B ratio would outperform the markets for the same reason hypothesized by Fama and French. 

The answer turned out to be the total opposite of folk wisdom. Our results are as follows in November 2019:

Returns 3 Years 5 Years 10 Years
All S-REITs in equal weights 12.67% 8.25% 13.31%
20 REITs with the lowest P/B 11.20% 7.28% 12.83%

Against a baseline of equally-weighted REITs if you bought the counters that had a low Price to NAV, would have underperformed across three backtesting periods. To rub salt in the wound, these portfolios operated on higher volatility.

Perhaps for REITs, a high P/B ratio acts as a proxy for management skill and was perfectly willing to pay a premium for them.

Regardless, it is highly dangerous and counter-productive to select REITs because it was selling properties at a cheap price relative to the market price traded on the SGX.

All Singapore stocks

Similar to the previous exercise on market capitalization we now back-test the low-PB strategy for small stocks. As before, we excluded China-domiciled counters, REITs and stocks below $50M in size. This eliminates the stocks from a list of 700 stocks to a new universe that consisted of only 303 stocks.

Our results were as follows:

Returns 3 Years 5 Years 10 Years
All 303 stocks in equal weights -0.90% -4.39% 3.00%
Half of the 303 stocks with lower P/B 3.95% -3.99% 3.95%

From this table, we can conclude that for the general market of Singapore stocks, a low PB strategy works. Picking low P/B stocks outperformed the rest of the stocks universe with a wider outperformance during bullish markets. The other comforting point we observed is that the portfolio had much lower volatility.

From the results shown above, we can at least conclude that the value effect still held sway in the Singapore markets for a subset of liquid equity counters that are not REITs, China-domiciled or smaller than $50 million in size.

In fact, this outperformance was significant across all three periods backtested and the portfolio performance was even done with lower volatility.

Note to retail investors: Please be reminded that investing purely for low PB ratio is still unsafe as this screen would result in 150+ counters. All ERM students go through a more detailed process to select stocks based on multiple criteria.    


Once again, academic theories should not be imported lock, stock and barrel into the Singapore Stock Market.

When investing in the more popular blue-chip and REIT counters, it would be dangerous to harbour the misconception that cheaper stocks outperform more expensive ones in Singapore.

Sometimes, a stock is cheap for a reason.

We do not have evidence that the value effect holds for blue-chip stocks or REITs abut at least we have evidence that the value effect holds sway when it comes to picking a larger universe of Singapore equities.

Editor’s Notes: A musing I have harbored for awhile now is that while the markets are inefficient, low hanging fruits of efficiency are being picked cleanly by more and more retail investors and fund managers.

There’s just too many guys who can see the same thing you can. The internet and basic knowledge isn’t absent from the world even if a majority of stock pickers continue to form the bulk of people losing trades. You need better understandings of how the markets works and a solid reason to invest in something beyond simply financial metrics and screeners.

That’s a big part of what we focus on in the Early Retirement Masterclass – even if we are biased towards dividends because in Singapore it’s tax free.

Dividends also enjoy a better performance because more people pile into it (passive income galore) for the yields as seen in the recent advances of REIT prices, resulting in yield compressions (as price increases because demand increases) and some sort of value coming into play because the share price shoots up.

Fundamentally, our program with an XIRR of 15% (30 if you leverage the way we do) is meant to capitalise on such opportunities and we will continue to hunt such opportunities. If you’d like to learn more, you can register for a seat to preview the program here.

Christopher Ng
Christopher Ng
    Juris Doctor(Cum Laude) Bachelor in Engineering from NUS (1st Class Honours) Masters in Applied Finance also from NUS. CAIA, FRM qualifications and passed all three CFA examinations. I have recently completed my Juris Doctor and have been called to the Singapore Bar. For the past 15 years I was an IT manager and I have worked in multinationals, financial exchanges, trade unions and even a government agency. I started my career as an AS/400 administrator and moved on to manage IT projects and operations. Through my personal savings and investments, I earned my financial independence at age 39 after my investment income started to exceed my monthly take home pay. One of my first acts upon retirement is to go back to Law School to reinvent myself as a legal professional. I am likely to be in the practice of corporate litigation. My three books on Personal Finance explain the processes by which I attained my financial independence. Growing your Tree of Prosperity was a local Straits Times bestseller in 2005. I was featured in Me and My Money sections in the Sunday Times twice. I also play the role of a husband and a father.
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1 thought on “Does the “undervalued effect” work in Singapore?”

  1. Lol the table results does not support your claim, it shows largest market cap stocks and not lowest p/b stocks in that category. Check your articles before posting next time.


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