UOB KayHian cut its target for the Straits Times Index, but said shares have become “more palatable” after their recent pullback.
It cut its year-end STI target to 3450 from 3720, saying it underestimated the potential pullback in the index amid escalating trade tensions.
The STI ended Friday up 0.23 percent at 3260.35.
“In addition, interest rates expectations have also been adjusted upward to four hikes rather than three in 2018 after the latest June FOMC,” or U.S. Federal Open Markets Committee, which sets monetary policy at the Federal Reserve, it said in a note on Friday.
But it noted the index has pulled back around 10 percent from its 12-month high of 3615, touched in May, saying that left shares at a “more palatable” 2018 price-to-earnings ratio of 14.2 times, compared with its long-term mean of 15.0 times. Additionally, its 2018 price-to-book ratio of 1.28 times was “inexpensive,” at an 18 percent discount to its long-term average, it said.
UOB KayHian said earnings growth was also still “robust.” It forecast market earnings per share (EPS) growth at 8.6 percent on-year in 2018 and 9.5 percent on-year in 2019.
“Given reasonable valuations, we would look to accumulate our key picks on sharp pull-backs,” it said.
Among its investment themes for the second half of 2018, it tipped mature growth plays such as Keppel, City Developments, CDL Hospitality Trusts and Raffles Medical.
It also said it liked “unloved stocks at attractive valuations,” including Sunningdale, SingPost, CSE and Tianjin. Another theme was stocks with earnings upside potential, including CDL Hospitality Trusts, SingPost and a tactical buy on Singapore Airlines. It also tipped defensive stocks with reasonable valuations and dividend yields, including Singtel and ST Engineering.