SINGAPORE (Dec 14): OCBC Investment Research says upside remains even as 2018 is unlikely to see a repeat of the “stellar gains” this year.

Year-to-date, the benchmark Straits Times Index (STI) has climbed 20% on the back of the financial and property sectors.

The financial sector led the way as the best performing sub-index in the Singapore market, with year-to-date gains of 31%. This was followed by the Real Estate Holding and Development Index, which surged 27%. The Singapore REIT index also performed well, rising 19%.

“While valuations have moved up this year, earnings have correspondingly shown good growth,” says OCBC analyst Carmen Lee in a 2018 Strategy report.

However, Lee notes that valuations are still inexpensive despite the strong double-digit gains.

“The STI is currently trading at forward PER of 14.4x (for FY18) and 13.4x (for FY19), giving a decent dividend yield of 3.3%. Price to book has moved up from 1.1x as at end-2016 to about 1.3x currently,” says Lee.

According to Lee, the worst appears to be over for Singapore banks in terms of oil and gas exposure.

“Net Interest Margins (NIM) have shown improvement in 2017 and banks have reflected the bulk of their exposures to the beleaguered oil and gas (O&G) sector,” says Lee. “Having taken the hit from the O&G sector, we expect allowances to revert to the norm from next year.”

OCBC’s top pick for the sector is DBS Group Holdings.

The research house is projecting a 25% increase in net earnings for DBS for FY18.

OCBC has a “buy” call on DBS with a fair value estimate of $27.40.

As at 10.51am, shares of DBS are trading 27 cents lower at $25.03.

On the property front, the URA Private Property Index saw its first uptick in 3Q17 after close to four years of decline.

Meanwhile, the pace of collective sales has quickened in the second half of 2017, with close to $7 billion of en bloc transactions already announced so far this year. This is the highest amount of transactions since 2007, which topped the list with total sales of $11.5 billion.

“Historically, en-bloc uptrend tends to point to market recovery,” says Lee. “With current higher land transaction prices, this also indicates that average selling prices are likely to head higher when these properties are re-launched in the coming years.”

OCBC’s top picks among the property stocks are CapitaLand, City Developments, UOL Group, Wheelock Properties, and Wing Tai Holdings.

The research house has “buy” calls on all five, with fair value estimates of $4.13, $13.50, $9.70, $2.27, and $2.77, respectively.

As at 10.51am, shares of CapitaLand are trading 3 cents higher at $3.54, shares of City Developments are trading 25 cents lower at $12.40, shares of UOL Group are trading 10 cents lower at $8.62, shares of Wheelock Properties are trading 1 cent higher at $1.90, and shares of Wing Tai Holdings are trading 1 cent lower at $2.29.

For the REITs, OCBC says it favours Frasers Centrepoint Trust, Frasers Logistics and Industrial Trust and Mapletree Greater China Trust.

The research house has “buy” calls on all three with fair value estimates of $2.40, $1.25, and $1.28, respectively.

As at 10.51am, units of Frasers Centrepoint Trust are trading flat at $2.21, units of Frasers Logistics and Industrial Trust are trading flat at $1.12, and units of Mapletree Greater China Trust are trading 1 cent higher at $1.20.