SINGAPORE (Jan 20): Daiwa Capital Markets is sticking to its year-end target of 3,040 for the benchmark Straits Times Index with limited upside.

Earnings are also expected to stage only a modest rebound in 2017 after declining at a faster than expected in 2016.

In its 2017 Singapore strategy report “Bracing for a correction”, lead analyst Ramakrishna Maruvada says the Singapore market looks fairly valued, following the recent rally.

An outlook of rising interest rates, stable oil prices and global trade conditions, depreciating Singapore dollar, and a weak domestic economy continues to be Daiwa’s base-line expectation for 2017.

“Given this, we think investors should continue to Overweight banks and instead trim their positions in property developers (now Neutral from Overweight), as the latter lack rerating catalysts. Oil & Gas remains an Underweight, as the sector is still reeling from unfavourable supply-demand dynamics,” says Maruvada.

And while it may be tempting to go long on traditionally defensive sectors such as the REITs and telecoms given expectations of a short-term pullback in the markets, Maruvada says a rising interest-rate environment and their weak fundamentals – flat DPU growth for REITs and new entrant threats for telecoms – could ultimately prove to be their undoing as the year wears on.

“Still, we prefer REITs (Neutral) over telecoms (Underweight) for investors seeking yield,” says the analyst.

Meanwhile, Trump’s presidency and domestic economic restructuring would likely be agenda-setting themes in 2017.

The repositioning of the Singapore economy is a work in progress, with the government set to drive some infrastructure and connectivity initiatives further over the coming year.

“ComfortDelGro remains our preferred play on this theme,” adds the analyst.

Daiwa is removing UOB, Hongkong Land and CapitaLand from its top-picks list.

Its revised top index picks are DBS, OCBC, ComfortDelGro, and City Developments.

For small caps, Maruvada is removing Cambridge Industrial Trust and BreadTalk following their recent share-price gains.

“Our revised out-of-index picks are Sheng Siong, Accordia Golf Trust, Starhill Global REIT, Frasers Centerpoint Trust and Yoma,” says the analyst.