SINGAPORE (Nov 26): Singapore’s stock market is unlikely to throw up much of a fuss if trade talks fail between the world’s two largest economies, according to Oversea-Chinese Banking Corp.

Even in the bear case where U.S.-China negotiations produce nothing, the Straits Times index will slip less than 1% over the next year, said Carmen Lee, OCBC’s head of investment research. Cheap valuations plus a recovery in earnings and dividends will keep the downside in check, she said.

“Valuations are inexpensive, dividend yields are high and price-to-earnings is below average,” Lee said. Cost reduction and rate cuts will aid earnings, she added.

Her base case factors in a limited deal between the U.S. and China, and a target of 3,435 for the Singapore equities gauge, which implies a gain of 6.7% from Monday’s close. The index can rise by 14% in a bull case scenario, Lee said.

Singapore’s key equity gauge has risen 4.7% this year compared with a 13% return for the MSCI Asia Pacific Index amid escalating trade tensions between the city-state’s two largest trading partners.

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Despite a retreat from August levels, the spread between the estimated dividend yield of the Straits Times index and Singapore’s 10-year bond yield is still near the highest level since 2009. Since at least 2008, the benchmark has rallied every time that gap climbed above 2 percentage points, according to data compiled by Bloomberg.

The benchmark, which is on track for a reduction in earnings this year, will see 4% growth in profits in 2020, Lee said. Valuations would also expand, she added. The index is trading at a PE of 12.6 times compared with its 10-year average of 13.4 times, according to Bloomberg-compiled data.

Analysts at Citigroup Inc. and DBS Bank Ltd. earlier this week said that earnings of Singaporean companies may have hit a trough, as U.S.-China trade tensions ease and global economic growth improves.

Global equities are heading for another month of gains amid hopes that a trade deal is around the corner. China on Tuesday said that the two nations have “reached consensus on properly resolving relevant issues” and agreed to stay in contact on the remaining points for a “phase one” trade deal.

Lee’s top picks for 2020 include Ascendas Real Estate Investment Trust, CapitaLand Ltd., NetLink NBN Trust and Singapore Airlines Ltd. She has dropped bank stocks from her top picks, citing outperformance and potential risks to net interest margins.