Too fast, too soon. FSSTI rose 50% in eight weeks, the fastest recovery from a bottom ever. FSSTI’s gain from the 9 March 2009 bottom is higher than most regional indices. In history, such magnitude of recoveries has only occurred when economic growth has swung from negative to positive. While there is the argument on liquidity supporting this large rerating, we believe the “green-shoot” recovery has been priced to a great extent.

Valuations – versus history and region. Singapore now trades at 1.4x trailing book, still lower than historic average (1.9x). However, the ROE profile is also significantly lower, with three-year forward ROE likely to remain in the 8-10% range, as against the long-term average of 14.6%. On regional basis, Singapore looks more expensive than its peers. Our target price on the index is now at 2,260, which is the average of our PB based target (2,502), P/E based target (2,159), and our bottom up target (2,125). This leaves a mild 7% upside from current levels.

Earnings cycle to lag. Further improvement in index levels will need to be supported by earnings growth momentum, which is unlikely to happen in the near term. Our bottom-up estimates factor a 45% peak-to-trough correction in Singapore earnings, with a 27% and 4% YoY contraction expected in 2009 and 2010. We note that our Singapore earnings profile is skewed towards (55%) sectors like banks, property, and industrial, which typically see delayed earnings recovery.

Our likes and dislikes Our top picks for the market are

United Overseas Bank (UOB SP - S$14.88 - BUY) for a better quality loan book,
CapitaLand (CAPL SP - S$3.41 - BUY) for its diversified asset base,
A-Reit (AREIT SP - S$1.40 - BUY) for its stable earnings flow,
SingTel (ST SP - S$3.04 - O-PF) for its market share growth,
Singapore Press Holdings (SPH SP - S$2.94 - O-PF) for the potential uplift in consumer sentiment,
ST Engineering (STE SP - S$2.36 - BUY) for its strong maintenance repair and overhaul (MRO) franchise,
Olam (OLAM SP - S$1.93 - BUY) for the structural food ingredient demand story, Ezra given its strong earnings outlook.

Our key negative ratings are for companies where were see structural problems in their market place, or business strategies. These include

OCBC (OCBC SP - S$7.38 - SELL) for its expected longer provisioning cycle than peers,
CapitaCommercial Trust (CCT SP - S$1.04 - U-PF) for a rather bleak outlook for Singapore office rentals,
Cosco (COS SP - S$1.16 - SELL) for weak charter rates and lack of new orders,
Comfort Delgro (CD SP - S$1.34 - SELL) due to headwinds in the group’s taxi and bus businesses,
Noble (NOBL SP - S$1.55 - SELL) for its weak earnings growth outlook.