It has already been a rough start to the year but the Straits Times Index (STI) could rebound in 2016, said OCBC Investment Research yesterday.
The STI declined about 14 per cent last year and shed 1.62 per cent on Monday, after the big sell-off in the Chinese stock market. It closed 1.06 per cent down at 2,804.27 points yesterday.
"I think there is a good chance we will rebound this year. I don't think it will be another year of a double-digit drop for the STI," said Ms Carmen Lee, head of OCBC Investment Research, on the sidelines of an investment seminar yesterday.
Key factors behind this optimism are the relatively cheaper valuations and the price-to-book ratios, which are near the historical low at 1.1 times, according to its forecast.
In particular, bank and property stocks may perform better this year, and the volatility in the markets may present buying opportunities.
Ms Lee said: "(For) banks, on average, the price-to-book is about 1.3, 1.4; they are trading at around one. (As for) property stocks, some of the smaller mid-caps are trading at an almost 50 per cent discount."
OCBC Investment Research said property counters will offer a lot of value. Developer Wing Tai Holdings, for example, could see a 51 per cent upside on its share price of about $1.71 this year.
Ms Lee added that the STI's price-to-earnings ratio could come in at 11.9 times this year, compared with the projected 12.5 times last year. Dividend yield is also forecast to come in higher at 4.3 per cent, up from 4.1 per cent last year.
Despite some scepticism over the STI's performance, Ms Lee believes there is more upside for the index.
"The markets tend to be six months ahead of the economy, so we are already pricing in almost all the negative news," she added.
Still, the key risks include a spike in order cancellations or weaker order books and the ongoing concerns about China's growth.
On Monday, trading on the Chinese stock market was suspended after the CSI 300 Index fell 7 per cent on weaker manufacturing data and jitters over speculation that a ban on share sales by major stakeholders could end this week. The sell-down sent ripples across global financial markets.
The economic reforms under way in China will continue to create market volatility, but OCBC analysts said it is unlikely to become a crisis.
"It will cause your stomach to churn, but it may not be enough to cause you to lose your job or wipe out your investment. It will cause volatility, but not enough to create mayhem," said Mr Vasu Menon, senior investment strategist, wealth management Singapore, at OCBC Bank.
China has "enough levers and ammunition to prevent the economy from going into a tail spin", he said.
