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SINGAPORE: Singapore's Straits Times Index (STI) is one of the best-performing among key indices in the region this year.
It is up by 49 per cent so far this year, better than Japan's Nikkei 225, which has added 19.6 per cent, and Hong Kong's Hang Seng Index, which has risen by 45 per cent, over the same period.
Gains in banking counters gave STI a boost, with DBS and OCBC up by more than 50 per cent. Other blue chips such as Keppel Land and Wilmar International also registered big gains.
Some analysts are warning that a pullback is likely as economic concerns come into play.
Tey Tze Ming, market strategist, Saxo Capital Markets, said: "We don't think it's too sustainable because the rise in earnings, although it has been surprising on the upside, has not been really compelling in that sense.
"We could see as we come to the tail-end of the Q2 reporting season that traders are going to be more focused on economic data, and our view is that the economy might not recover as quickly."
James Lim, analyst, DMG & Partners Securities, said: "While the headline numbers do suggest that the respective report cards of these blue-chip firms were better-than-expected, note that market expectations were not high in the first place."
Investors appear willing to pay a higher premium for blue chips compared to two years ago when the STI hit an all-time high in October 2007. But market-watchers said current valuations are overpriced.
The STI is currently trading around 17 times price to earnings – significantly higher than the 15 times prices to earnings in 2007.
Vincent Ng, associate director, Asia Equity Research, Standard & Poor's, said: "You won't be diving right now into the markets unless you see something very attractive, something that may be very attractive in terms of valuations, for example low PE (Price-to-Earnings) stock, providing maybe a very decent dividend yield, and decent prospective earnings growth.
"Investors should be sticking to some simple rules. Try not to overpay. Look for good companies with solid fundamentals – good balance sheet, good recovery prospects. But pay close attention to the price that you are paying as well."
Still, some said Singapore is attractive when compared to other key regional markets such as Hong Kong.
"You see a lot of excess money sloshing around and we've some evidence to show that part of it at least is being pushed into assets, and that's what's driving up prices. So the problem in Hong Kong is, if some of this liquidity starts to dry off, you're going to see a bigger pullback compared to Singapore. So, Singapore six months out, still a better bet," said Mr Tey.
Some analysts remain cautious about jumping onto the bandwagon right now, given the current valuations of Singapore blue chips. But for investors looking to enter the market, they said defensive plays are the way to go, such as SingTel, CapitaMall Trust and Suntec REIT.
Mr Tey said: "The growth names have obviously outperformed because everyone is pricing in the fact that we're going to see early recovery. Our view is that that's not going to happen any time soon. So, while the growth names might have a little pullback, you could see some of that flow back into defensives. So, the defensives would be back in demand."
Pearlyn Wong, investment analyst, Bank Julius Baer, said: "I would not advocate an aggressive buy on recent 'winners' after the recent run up. We would prefer to sit and wait for the inevitable correction on these. We prefer defensive blue chips like SingTel, SPH, CapitaMall Trust and Singapore Post at these levels."
"Our top picks include City Developments, Suntec REIT and UOB," said DMG & Partners Securities' analyst, Mr Lim.
- CNA/so
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