Given speed of rally, some analysts worry about near-term correction
By LYNETTE KHOO
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(SINGAPORE) Even as the market continues to power ahead on signs of 'green shoots' in the economy, analysts are in no hurry to upgrade their targets for the benchmark Straits Times Index (STI).
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Some are looking to do so in a matter of weeks while others are afraid that the recent spike could be a false start.
Yesterday's rally saw the STI adding a further 62.57 points. It ended the day on 2,241.60 points, pulled along by the regional bourses on hopes of encouraging news coming from the stress test results of US banks.
Credit Suisse upgraded its view on the Singapore market yesterday to 'overweight' from 'underweight' without an STI target on the belief that 'it is the most attractive among the laggard markets.'
CIMB-GK also recently upgraded its view on the Singapore market from 'neutral to 'overweight' - its first 'overweight' rating on the local bourse in two years - and raised its year-end STI target from 1,800 to 2,160 points. It is reviewing its STI target after the earnings reporting season is over.
'The likelihood would be an upgrade,' said CIMB-GK research head Kenneth Ng. 'I think the rally will continue for months,' he said. 'The Singapore market is still very cheap and it is one of the key underperformers.'
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Mr Ng expects the market to pull back after the recent frantic run but given the liquidity on the sidelines, investors will likely buy on dips.
Citi, which has a target for the Straits Times Index of 2,400 by March next year, hasn't upgraded its STI target yet. Neither has UBS, which forecasts a year-end STI target of 2,100 points, a level that has been breached. Both brokerages just upgraded their targets two weeks ago.
The earnings season, which was widely expected to reveal nasty bruises from the economic crisis, tossed up better-than-expected results.
Earnings at local banks OCBC and UOB released this week exceeded analysts' forecasts and the moderate rise in their non-performing loan ratios assuaged concerns over a potential surge in bad debt charges.
But given the speed at which the market has rallied, some analysts are now worried about a near-term correction.
Kim Eng technical analyst Ken Tai said the market 'is running too fast' as fund managers reloaded their portfolios.
'I'm still sceptical of this market as we are already 1,000 points from the low,' Mr Tai said. 'I'm waiting for a correction to happen.'
Mr Tai advises selling in May and coming back at a lower level in two to three months' time. But he recommends 'trading buys' on the second liners.
Last Friday, Merrill Lynch issued a note of caution that the rally in the US has been a technical event. The primary source of buying power is coming from a huge short-squeeze and perhaps some pension fund rebalancing, it said.
While 'green shoots' may seem to be more and more credible - positive news from the banking sector and the well-contained situation concerning swine flu, SIAS Research vice- president Roger Tan noted that any upside in the STI may be limited over the next one to two months.
The STI is currently trading at 11.5 times price- to-earnings ratio compared to last year's PE of 11.6 times. In the near term, there is room for the STI to fall towards the 2,000 points level on profit-taking from mid-May to end of the month, Mr Tan predicts.
The downside risk is likely to come from developments in the US auto sector.
But in the longer term, 'there seems to be value ahead' given the current low price-to-book ratio of 1.3 compared to last year's 2.1, Mr Tan added.
He recommends accumulating on weakness in exchange traded funds of the STI, commodities and gold, as well as banking stocks.
In a canny tweaking of the adage 'sell in May and go away', Mr Tan asks investors to 'sell in May but don't go away' as there are still opportunities to grab.
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