The recent rally has stretched valuations to an unappealing 1.5x 2009E BV (from 0.8x), close to the historical average of 1.6x P/BV. At this level, the market has factored in an economic recovery, in our opinion. As long as a strong global economic recovery remains opaque, it is unlikely for valuations to stretch beyond the historical average. We believe the market will be well supported at 2,000 FSSTI or 1.2x P/BV, representing one standard deviation below historical average.

We still hold the view that market correction is unlikely to be deep as we sense that there is still ample amount of cash awaiting to gain entry. We believe the current market consolidation could last one quarter before staging a comeback in the fourth quarter as clarity with regards to a global economic upturn emerges.

As risk appetite recedes, defensive names like SMRT, SingTel, StarHub, SingPost and SPH will start to outperform the market. We have BUYs on SMRT and SingTel but HOLD on StarHub.

We recommend investors accumulate stocks on price weakness. For that, we prefer the larger and higher-beta sectors like banks (UOB is our preferred pick), property (City Developments) and offshore and marine (SembCorp Marine). At this juncture, we have a Neutral stance on the banking and property sectors, but a Positive stance on the offshore and marine sector. For exposure to small-cap names, we recommend CSE Global and Ezra Holdings.

We raise our FSSTI target to 2,600 from 2,500 previously. The increase came about as we roll over our base year to 2010 (from 2009) and after ascribing a 1.6x P/BV multiple (previously 1.5x). The higher P/BV multiple is warranted as we believe the recent round of highly-dilutive rights issues is drawing to an end. We maintain our OVERWEIGHT stance on Singapore. However, our regional strategist, Clive McDonnell, has an UNDERWEIGHT rating on Singapore from a regional perspective, as high-beta North Asian markets are his preferred choice. Clive is of the view that on a relative basis, the Singapore market will continue to underperform compared to the North Asian markets.