SINGAPORE shows a clear pattern of further economic strength for the rest of the year, but VP Bank AG remains neutral on the city-state.

The Liechtenstein private bank noticed that in the second quarter, the Singapore equity market has underperformed the MSCI Emerging Markets Asia benchmark.

"The consolidation shows stable pattern, and heated technical indicators got neutralised," VP Bank said in its report, Investment Navigator Asia: Q3 2017 on Friday, adding that the positive surprise effect has disappeared.

"Singapore's economy will benefit from global growth and a stronger China. For the next six months, we see advantages for financials and consumer spending. The positive development with the macro recovery should spark improved consumer sentiment and spur consumption," it said.

However, despite the low premiums given to Singapore's valuations, they are not as attractive as those of its Asean peers because of low profitability and return on equity (ROE).

Looking ahead into the second half of 2017, VP Bank said that there are good chances of earnings upgrades for banks, manufacturing and consumer discretionary, but transport would suffer further from low profitability and tough competition.

"Hence, we assume a more mixed picture going forward while the positive impact on earnings and growth surprise is gone now," it said.

On the outlook for the Singapore dollar, VP Bank said that if China decides to further devalue the yuan later this year, that would have implications for the monetary policy in Singapore.

"The Monetary Authority of Singapore will then prefer a weaker currency in the coming quarters. In any case, as inflation is in retreat, there is no reason to expect a substantial appreciation of the Singapore dollar against the US dollar," it concluded.

For the region in general, VP Bank expects growth in most of South-east Asia's biggest economies to weaken into the year-end, with domestic demand fragile and exports poised to slow. Central banks are likely to respond by keeping rates low. It believes that the scope for further cuts is limited, given concerns about capital outflows and currency stability.

While most of Asia offers better valuations than developed markets, VP Bank said that many in the region are quite richly valued. Emerging markets in Asia have outperformed global equities, generating 27 per cent performance year to date. It said that 2016's turnaround created a strong uptrend in 2017 and triggered its decision in May this year to be overweight on emerging markets with a clear focus on Asia.

The bank is overweight on China and neutral on Singapore, Thailand, Indonesia and the Philippines. It is underweight on Australia and Malaysia.