Singapore hits buy signal

According to Credit Suisse, Singapore has hit "Buy" as at 12 Jul. Korea remains the biggest Overweight, and both Hong Kong and China have hit their “Buy” signals. The bank uses the Six Factor valuation model, which looks at markets relative to their own history and works well at extremes. The six factors used in this
valuation model are historic P/E, price-to-cash flow, dividend yield, P/E adjusted
by inflation, price-to-cash flow adjusted by inflation and the earnings yield
adjusted by the bond yield. Biggest contributor to the current undervaluation is the
earnings yield adjusted by the bond yield.

The historical success rate of the past seven “Buy” signals (including 2008) is 76% in the 3, 6 and 12 months after. In other words, the Straits Times Index rose 76% of the time in the 3, 6 and 12 months after. The average gain in the Straits Times Index was 9% in the 3 months after and 18% in the 12 months after (except for 2008, the rally was 28%).

With the relative price performance of cyclicals(Industrials, Energy, Consumer Cyclicals, Tech) versus defensives (staples, Telcos) tracking the US ISM, we think the rebound in Japanese industrial production (up 6.2% in May) and US ISM in June (from 53.5 in May to 55.3 in June) suggests looking at cheap cyclicals, such as Keppel Corp, Sembcorp Marine and NOL (Neptune Orient Lines). Singapore cyclicals trading
on the biggest discounts are: Yangzijiang Shipbuilding, NOL, Sembcorp Marine and
Keppel Corp. Price targets for Semb Mar and NOL (in my portfolio) are $6.60 and $2.40respectively. MSCI Singapore cyclicals have underperformed defensives by 10% since
30 April 2011.

Key risk to buy call in Singapore is a global double dip.