STI closes in on 2,000

Yesterday, the Straits Times Index (STI) closed 18.09 points higher at 1,985.79, its highest close since 13 February 2001.

According to a report in The Straits Times today, some analysts think that the STI should be able to rise above the 2,000 level soon.

Yesterday's rise took the STI another step closer to breaching the psychologically important 2,000-point level -- a feat which analysts had earlier predicted would take place in the next six to 12 months.

"We believe that the STI will approach its estimated fair value of 2,150 (or 14 times forecast market earnings in 2005) by the first quarter of 2005," said Merrill Lynch in a research report last Friday, fanned by "market-friendly corporate events" such as the takeover bids by Temasek Holdings for United Overseas Land and Neptune Orient Lines. Earlier, JP Morgan raised its year-end target for the STI to 2,011 points from an earlier estimate of 1,938, while DBS Vickers set a target of 2,100 by year-end.

But sounding a note of caution, UBS said "conditions are not conducive to a broad-market rally for 2005 due to rising interest rates and falling earnings per share growth". However, it predicted a fair value of 2,200 points for the STI in the next six months, based on the projected price targets for individual STI-linked stocks.

I tend to agree with UBS. Based on projected earnings, the index stocks appear decently valued. However, in the recent market rally, the breadth has been relatively narrow. While the STI is making multi-year highs, the UOB Sesdaq index for small-cap stocks -- at 93.69 based on yesterday's close -- is still 25 percent below last year's peak of 124.79.

So, in what may be the last leg of the bull market, the blue chips are likely to outperform the broad market over the next few months.