By Teh Hooi Ling

ONE of the major complaints about stocks traded on the Singapore Exchange (SGX) is their relatively lower valuation, particularly for S-chips or China companies listed in Singapore.

And as market wisdom would tell us, price-earnings ratio is directly correlated with the liquidity of the market. High liquidity would imply a higher volume of funds chasing the securities. So, theoretically, there would be a higher likelihood of the securities trading nearer their fair value.

Let's compare SGX with the other rival regional financial market: Hong Kong. According to data from Bloomberg, the Hang Seng Index is now trading at 15 times price-earnings ratio (P/E), two times price-to-book (P/B) and 2.7 times price-to-sales (P/S). In comparison, the Straits Times Index (STI) is now trading at 12.7 times P/E, 1.8 times P/B and 1.6 times P/S.

Perhaps one of the contributing factors to the valuation gap between the two bourses is the lower liquidity here. Based on our calculations, derived by taking the mainboard equity turnover for 2010 divided by the average mainboard market capitalisation for the two bourses, the turnover velocity is higher in Hong Kong. Specifically, it was 65 per cent in Hong Kong and 56 per cent in Singapore.