Higher interest rates will benefit some parts of Singapore's economy but this could be offset by softer domestic demand and a slowing China, said JP Morgan.
The American bank noted that while it has mixed views on the Asean markets for the next year, it is underweight on Singapore.
"We are taking a cautious view (on buying into Singapore)," said Mr Aditya Srinath, JP Morgan's head of Asean equity research, at a briefing yesterday.
Mr Sirnath noted that Singapore's economy is making the transition to a productivity-driven growth model after a lengthy period of being heavily dependent on foreign workers.
"You don't have a smooth transition from one way to the other. Therefore, right now, you see a patch of slow growth," he said.
But the bigger concern now is the risk of deflation, as consumer prices have been steadily falling for the past 12 months.
Home prices may also keep dropping next year, and could plunge by as much as 8 per cent, he warned. In the first three quarters of this year, prices have dropped by around 3 per cent.
"Overall, it makes for a fairly challenging outlook for domestic demand," said Mr Sirnath.
He thinks that agri-business, the stock exchange and airlines have the potential to do well next year.
The impact of El Nino - the weather phenomenon caused by Pacific Ocean warming - would result in a reduced supply of palm oil. This, combined with higher biofuel mandates in the region, would push prices up.
"We think plantation and agri- based businesses have further upside here," said Mr Srinath.
In the financial services sector, JP Morgan favours exchanges over banks, citing the fairly high dividend yields and relatively lower downside risks.
He added that stock exchanges will "offer some optionality" when the economy recovers. "So we prefer exchanges over banks, particularly in Singapore," he said.
Depressed oil prices coupled with some optimism about global growth improving suggests that airlines and related industries such as aircraft servicing and maintenance are a good bet.
In a JP Morgan stock pick report released last week, there was one oil-linked name listed. "It's just a case of optionality," said Mr Sirnath, "in case oil prices pick up in the second half of the year."
Mr Sirnath suggested staying away from the offshore marine sector, telcos and banks.
He cited the potential for increasing competition in the telecommunications industry and vulnerability on asset quality for the banks as reasons to steer clear of stocks in these sectors.