STI market outlook by Merrill Lynch

Merrill Lynch said the benchmark Straits Times Index may hit 2,840 points by yearend, citing strong economic and corporate fundamentals. "Due to strong macroeconomic outlook, the increase in our GDP expectation, the increase in the 2006 corporate growth rate expectation and the signs of positive wealth effects, we believe it is too early to back away from our positive view on the Singapore market," Merrill Lynch research head Tony Raza said in a note. Merrill Lynch said 2,840 points for the key equities index is based on a multiple of 17.5 times earnings forecasts for 2006. It was earlier looking at a mid-year target of 2,460. He said the brokerage continues to recommend market laggards such as banks which would benefit from the economic upswing. Merrill Lynch said DBS Group Holdings and United Overseas Bank should lead the rally in the second half, along with Suntec REIT, Fraser & Neave, Singapore Airlines, City Developments, Jardine Cycle & Carriage, Chartered Semiconductor, Singapore Press Holdings and Singapore Petroleum Corp.

"We continue to believe that small caps and China caps that have extraordinary runs are merely correcting significant miss-pricing and still offer more upside though on a more selective basis from these levels," Raza said. Unisteel, GES, Memtech, OSIM and Petra Foods are its bets among small capital stocks while the brokerage favors Beauty China, FibreChem, Celestial, DMX and Fung Choi among China-linked stocks. Merrill Lynch dropped its rating on real estate investment trusts to "market weight" on account of "the combination of interest rates and capital raising headwinds.""We also downgrade property largely as we think the casino theme has largely played out and we could pave softness into the actual announcement, especially since the Sands bid appears compelling," Raza said. At the close of morning trade, the Straits Times Index was up 2.13 points at 2,552.47.