This important valuation signal says it's time to buy Singapore stocks

In recent years, Singapore's stock market has been a good place to lose money. But that might be about to change.

The Straits Times Index (STI) is down 27% in US dollar terms over the past three years, not including dividends. Over the past year, it's down 22%. And in 2016 so far – despite the 13% jump since lows in January – it’s down 2%. That’s better than the Shanghai Composite's 21% loss so far this year, but is about the same as the MSCI Asia ex. Japan index (-5%) and the MSCI World Index -1%).

Markets in Asia overall haven't performed well in recent years. The MSCI Asia ex Japan Index, which is a broad gauge of stock markets in the region, is down 24% over the past year, and 16% over the past three years. Singapore has been an underperformer in an underperforming region.

For the past 25 years, the STI has only returned 2.4% per year (without dividends). Of course, that's just an average. In 2009, the STI moved up 68%. But if you caught a bad year, you'd be in trouble – for example, the STI fell 49% in 2008. (Returns are in US dollar terms.)

Based on the headlines, Singapore's economy and stock market look like they're in trouble… and that 2016 is likely to be a bad year. For example, economic growth has stalled – it was at 1.8% for the first three months of this year. Real estate prices have dropped 11% since their peak in April 2013. Prices have been falling for a record 17 months in a row and many investors are concerned about the potential impact of deflation. Meanwhile, Singapore was recently re-crowned the world’s most expensive city, which in most circles isn't something to brag about.

Apparently fearful of further economic weakness, the country's central bank last month eased its monetary policy, Singapore style, by saying it will not allow the Singapore dollar to increase in value.

Meanwhile, global trade – the coffee, toast, and chicken rice of Singapore's economy – fell 13% in total US dollar terms in 2015. World merchandise trade only grew 2.8% last year – the fourth straight year of below 3% growth.

And China, which accounts for 12% of Singapore’s exports and 12% of its imports, is looking wobbly, with continued concerns over its economic growth.

However… one important valuation trigger suggests that the doom and gloom around Singapore's stock market might actually be wrong.

One way of looking at the valuation of stocks and markets is the price-to-book ratio (P/B), which compares the market capitalisation of a company to its book value (which is what's left after debt is subtracted from the value of everything the company owns).

Since 1980, the P/B ratio of Singapore's stock market has averaged 1.44. Right now, it's hovering around 1. This means that investors think that, as a whole, companies traded on the Singapore stock market are only worth as much as their net assets.

As shown in the graph below, over the past 30 years, whenever the P/B ratio of the Singapore stock market has fallen to 1 or less, the market has rallied sharply. For example, in April 1986 the P/B was 1. Then the STI proceeded to climb 48% over the next four months. In February 1988, the P/B ratio approached 1, then the STI had another 60% gain over the following one and a half years. Then in 2009, the P/B dropped below 1 just before the index rallied 89% over the next 18 months. Additionally, in the one-year period from August 1998 to August 1999, the STI index soared significantly 115% after the P/B ratio dropped below 1.

Is that going to happen this time? History suggests that the Singapore stock market offers a good risk/reward trade-off at these levels.

To invest in the market, it's easiest to use an ETF. You can buy the SPDR Straits Times Index ETF (Singapore; code: ES3), or the iShares MSCI Singapore fund (ticker: EWS), on the New York Stock Exchange.

Sign up below to receive the Truewealth Asian Investment Daily, a free e-letter that brings you independent insight on investing in Asia that will save you time and make you money...