In the past few days, there were softness and consolidation in the market. We view this favourably as the STI has already gained about 80% from the low in March (vs. 54% for the S&P 500). US shares corrected, largely due to lower-than-expected durable goods orders and home sales data, which in turn dragged down regional markets.

In addition, current higher valuations have also caused investors to become more cautious as valuations have risen sharply compared to two quarters ago. With September being a traditionally difficult month for equities, the recent high trading volumes, especially for smaller-cap stocks, seem to suggest that there is still interest in the Singapore market.

Not completely out of the woods
While the global economy is in a recovery state, valuations are not as cheap as before and investors are generally finding it less attractive to buy equities now. Recent calls by US Treasury Secretary Timothy Geithner for increased levels of bank capital could also be a dampener on banks. The S&P's 500 Other Diversified Financial fell 5.9% in the last four days of last week vs. only 2.5% for the broader S&P 500 index.

Still mixed indicators
Against this backdrop, and with investors staying on the sidelines while waiting for this Friday's Sep unemployment data (market median expectation of 9.8% in September versus 9.7% previously according to Bloomberg), there could be gradual easing in share prices this week. Without a compelling increase in earnings or an increase in order books and based on current valuations, there are limited impetus for stocks to enjoy the next up leg for now.

In addition, trading patterns have also shown that movements for the STI have been kept within a narrow range in the last two months hovering close to the 2620 level. There were some cyclical plays, but the overall tone for the market looks muted at current levels as there are still mixed signals about the strength of the recovery or the potential upside for equities.

Emergence of more IPOs and M&As
Recently, EBay Inc. agreed to sell a 65% stake in Skype, the Internet-calling unit, to a Silver Lake-led consortium for about US$2bn. Telefonica SA, Europe's second-biggest phone company, is paying US$1bn to boost its stake in China Unicom (Hong Kong) Ltd from 5.4% to 8.1%. Kraft Foods Inc. also made a US$16.7bn bid for Cadbury Plc. In Singapore, the IPO market is also starting to thaw and several IPOs came into the market including PEC, Mary Chia, Lattitude, Passion and China Gaoxian.

And risk appetite has definitely improved
Investors buying in the past few months are positive signs that confidence is seeping back into the market. More importantly, it signals that risk appetite has returned, and this is essential to sustain interest in the market. The STI is trading at 17x PER, just a shade below its historical average of 18x PER (S&P 500 PER of 17x now). Nevertheless, we note that Singapore remains one of the more attractively priced markets in the region at 17x PER vs. China's CSI 300 of 21x and Nikkei's 44x (Hong Kong is on par at 17x). Sustained liquidity in the system, M&As and further earnings upgrades may continue to support these valuations. As key policy makers are reluctant to throw a spanner into the current still fragile global recovery, we expect government policies to remain favourable for the corporate climate, including the still-low interest rate environment. However, possible headwinds include central banks tightening monetary policy, hike interest rates or raise tax rates. We continue to favour a stock pick strategy. In recent times, several stocks have reached our fair value estimates riding on renewed buying interest in equities, but we still see value in others. We continue to like Ascott Residence Trust, ASL Marine Holdings, DBS Group, Hyflux, Midas Holdings, MobileOne, Noble Group, Olam International, Sembcorp Marine, SMRT Corp, SingTel, StarHub, UOL Group and Wilmar International.

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Stock Pick
CNA: Buy (DMG, 18 Nov), Kian Ann Engineering: Neutral (DMG, 18 Nov), SPH: Buy (UOB Kay Hian, 17 Nov), Singapore Airlines: Buy (Kim Eng, 17 Nov), Oceanus Group: Buy (OCBC Research, 17 Nov), Swiber Holdings: Hold (OCBC Research, 17 Nov)