DBS sees choppy Q3 for STI as investors pivot from Singapore banks to listcos that are unlocking value

[SINGAPORE] DBS Group Research expects the Straits Times Index (STI) to face a choppy third quarter, and a tactical rotation away from local banks, citing an increasingly concentrated rally that has left index valuations elevated while broader market performance lags.

In their Singapore Market Strategy report on Wednesday (Aug 5), analysts Yeo Kee Yan and Foo Fang Boon noted that the STI reached 5,581.37 on Aug 5.

“The stock market rally has become increasingly concentrated, with banks and SGX (Singapore Exchange) contributing 95 per cent of the STI’s gains year to date and more than 100 per cent of gains since the US-Iran conflict,” the analysts said.

The net contribution from the remaining 26 component stocks was just 50 index points year to date. Since the onset of the war, the net contribution from the remaining 26 stocks was minus 184 points.

“With bank headline valuations stretched and dividend support fading post ex-dates, we see rotation into alternative themes with stronger H2 2026 catalysts, including value-unlocking opportunities, Equities Market Development Programme (EQDP) beneficiaries and selective mid-cap growth stocks,” DBS said.

Bank stocks to consolidate

The brokerage expects bank stocks to consolidate following their stellar run, as valuation multiples remain high and cash distributions pause.

“With the three banks’ price-to-book valuation having gone ballistic… and their dividend yields compressing... we see a potentially rocky month ahead for bank stocks,” the analysts said, noting that dividend support will “temporarily take a back seat post ex-dividend dates in August”.

DBS expects market participation to broaden beyond banks as oil prices drop and as interest rate expectations stabilise following the Federal Reserve’s decision to keep rates at 3.75 per cent in July.

Rotation into other themes

The brokerage sees earnings re-emerging as the primary driver of stock performance, as investors rotate towards sectors with stronger H2 earnings momentum and positive guidance.

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It also sees valuation catch-up opportunities emerging in “lagging sectors, particularly those previously weighed down by higher-for-longer rate expectations”.

DBS identified Yangzijiang Shipbuilding , ST Engineering , and Sats as key picks.

Real estate investment trusts (Reits) and property developers are also expected to see interest.

The brokerage stated that S-Reits, with industrial Reits such as CapitaLand Ascendas Reit as their preferred pick, should remain well-positioned for a valuation recovery should markets pare back expectations of further rate hikes, supporting multiple expansion and renewed investor interest.

Yeo and Foo also favour high-growth and catchup plays including Centurion Accommodation Reit and Parkway Life Reit .

The analysts also called it “an opportune time to revisit stocks with intact value unlocking stories”, including UOL Group , City Developments , Jardine Matheson and Singtel .

In the small-to-mid-cap (SMID) space, the analysts highlighted that about S$4 billion has been allocated, with a further S$2.6 billion pending following the Budget 2026 S$1.5 billion top-up under the EQDP.

DBS expects these pending deployments to support broader market constituents.

The analysts point to SMID picks such as China Aviation Oil , UMS , AEM , Keppel Reit , Centurion Accommodation Reit, UOB Kay Hian , First Resources and YZJ Maritime .

On specific risks, the report noted that the tech sector is “likely to remain volatile as investors are becoming increasingly watchful of tech stocks amid greater scrutiny of artificial intelligence monetisation”.

The analysts said: “This should encourage investors to explore stocks outside the sectors that have captured less investor attention year to date. While we are positive on AI, there are other themes that remain well intact including value unlocking opportunities.”