STI could hit 3,400 by year-end: Report
04:46 AM Mar 05, 2012
SINGAPORE - The Straits Times Index (STI) could hit the 3,400 mark by the end of the year if all goes well with the US economy.
According to a report by Credit Suisse, Singapore shares that make up the STI could also see a slowing in the rate of downgrades.
"As with other markets, there is a fairly good fit between the STI and US jobless claims that are our proxy for global/US growth.
"This relationship also suggests potential upside for the STI towards 3,300 to 3,400," the report said.
But while Credit Suisse's projection suggests a potential upside, performance still lags the historical average.
"We do note that even with this 13 per cent upside, price-to-book for Singapore rises from the current 1.49 times (the price-to-book ratio) to 1.68 times versus its historical average of 1.75 times since 2000."
Nevertheless, Credit Suisse found that the rate of 2012 estimated consensus for earnings per share downgrades over the past three months are under 1 per cent per month versus downgrades of 2-4 per cent per month in the prior four months.
With optimism that the US economic recovery is on track, Credit Suisse favours cyclical stocks over defensive stocks.
"While we could see some near-term profit-taking as cyclicals have outperformed defensives by 18 per cent since the lows of Sept 30, 2011, we believe valuations and potential further upside in the US ISM (the Institute for Supply Management's factory index) still favours cyclicals over defensives," it said.
Credit Suisse's picks include Olam, Noble, STX OSV, Keppel and Sembcorp Industries.
It highlights that the biggest discount is with STX OSV, which it estimates to be trading at a discount of 172 per cent by comparing relative price-to-book with relative return on equity (ROE).
It also noted discounts of 23 per cent and 9 per cent for Keppel Corp and Sembcorp Industries, respectively. "While undervalued stocks may be undervalued because of rather poor fundamentals, among cyclicals Olam and Noble, price-to-book are the closest to 2008-09 lows, while STX OSV, Keppel and SCI are trading on discounts on our price-to-book versus the ROE valuation model," it added.
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