I often find it very misleading when people tell me an index is cheaper than the other because the P/E ratio is cheaper. Why?
Different Composition
The composition of one index is very different from another.
- Number of counters in each index can be hugely different. For example, there are 30 component stocks in STI; while there are about 500 component stocks in S&P 500; weightage of each sector is different from one another as well.
- Weightage of certain sector in each index is different. E.g. HSI consists of richly valued Tech Stock while STI has no single Tech stock in it.
- Sometimes certain sector in an index is terribly beaten down by the market when it is just out of favour which investor should just stay away.
It is hard to generalise if an Index is undervalued when an overweight sector is plague by structural problem, e.g. banking sector can be struggling with lots of bad debt/book which had not been written off from the accounting book and that is why we get hugely discounted stock price.
What should investor do?
I always advocate individual stock investing. We should investigate individual stock rather than generalising the entire index and conclude whether they are cheap or expensive.
