Best trading strategy for Straits Times Index revealed

Start by owning inexpensive big caps.

According to UOB Kay Hian's updated Singapore market outlook and strategy, the next step would be to accumulate a high active return on investment from mid-cap companies, which could outperform large caps in 2013. Key picks chosen for big caps include DBS, M1, OUE, Suntec REIT and SIA Engineering, while for mid caps, the brokerage firm prefers Silverlake, Sino Grandness, Ying Li, Triyards, Kreuz and GuocoLeisure.

Here's the full review and strategy from UOB Kay Hian:

Review. The Straits Times Index (FSSTI) rose 1.17% mom to 3,308.1, in line with its Asean peers. Despite mixed macroeconomic data points such as uncertainties over Cyprus and Singapore's weak February IPI (which fell 16.6% yoy), markets were buoyant on expectations that the economic recovery in US could pick up momentum. Sectors that led the upward charge in Singapore included banks (+5.7% mom) and telecommunications (+4.4% mom). As for stock specifics, SPH spiked 7.2% mom on hopes that the group may "REIT" its retail malls to crystallise the value of its assets.

Strategy. We have a constructive outlook for 2013, with equities likely to outperform other asset classes such as bonds. Our year-end target for FSSTI is 3,500 on a bottom-up basis. Given the limited upside from current levels, mid caps could outperform large caps in 2013. Our 2013 strategy would be to own a basket of inexpensive big caps with alpha from mid-cap companies. Themes include: a) companies with strong cash generation, b) quality mid-cap plays in oil services and consumer, c) undervalued stocks with catalysts, and d) rotation into office and hospitality S-REITs.

Our key picks for 2013 in the big cap space include DBS, M1, OUE, Suntec REIT and SIA Engineering. For mid caps, we favour Silverlake, Sino Grandness, Ying Li, Triyards, Kreuz and GuocoLeisure. Key risks include external risks on global growth outlook and geopolitical risks in the Korean peninsula.