STI headed for major correction around June

IF HISTORY repeats itself, Singapore's stock market will undergo a major correction around June - 16 months after this rally started.

That is according to DBS Bank's analysts, who have noted that after the last two major recessions, the initial stock market rallies that followed lasted exactly 16 months each.

'Post-recession, how long does the market rally before it sort of peters out? History has shown the magic number is 16 months,' said Mr Timothy Wong, managing director and head of group research at DBS, at a media briefing yesterday.

He expects a bullish first quarter, in which the Straits Times Index (STI) will hit about 3,080 points. But somewhere in the middle of the year, the markets will experience a sharp pullback, he added.

'If there is no major correction of 20 per cent or more in the first half of the year, there will be one in the second half,' said Mr Wong.

The good news is that the STI will likely rally again after the correction to finish the year at about 3,500 points, he added, saying he expects a gain of about 15 per cent to 20 per cent for this year.

Mr Wong recommended stocks in the services sector, including transportation, hospitality and high-end properties, which will be boosted by the opening of the integrated resorts this year.

Oil and gas and consumption plays are also a focus this year, as a return to global growth fuels demand for oil and gas production platforms as well as domestic consumption.

The mood in the market now is optimistic rather than euphoric, Mr Wong said, although stronger- than-expected growth in the United States could result in a boom in exports and tip sentiment over to the exuberant levels of 2007. But on the flip side, markets could be shaken by a sudden surge in inflation.

DBS Singapore economist Irvin Seah said at yesterday's briefing that although inflation has begun to creep up, it is not yet at a threatening level.

That has important implications for monetary policy here: It means that the Monetary Authority of Singapore (MAS) is likely to stick to its current neutral exchange rate policy of zero appreciation in the Singapore dollar when it next meets in April, he said.

Mr Seah expects the MAS to return to the pre- recession stance of gradual Singdollar appreciation only in its following meeting in October, when inflation has picked up more significantly. A more expensive Singdollar helps to mitigate inflation here as it offsets the higher prices of imported goods.

As economic growth gathers steam and inflation returns, most of the other central banks in Asia will also start to raise rates this year, said Mr Wong.

For the property sector, Mr Wong expects HDB and mass market private housing prices to stay mainly flat this year, as the Government is keeping a watchful eye on runaway prices in these sectors.

But high-end home prices will jump by 10 per cent to 15 per cent, due to more limited supply, the integrated resorts drawing in investors, and spillover demand from Hong Kong, where luxury home prices have skyrocketed, he said.