The Anatomy of a Narrow Rally
Singapore’s Straits Times Index has delivered impressive gains in 2026, but the rally has been remarkably concentrated. According to DBS Group Research, the three local banks and the Singapore Exchange contributed 95.2% of the STI’s 1,025-point rally year-to-date, while the remaining 26 component stocks added just 50 index points between them. This extreme concentration has created a peculiar situation: while the index appears expensive on a headline basis, a significant portion of its constituents remain deeply undervalued.
The Bank Valuation Dilemma
The banking trio—DBS, OCBC, and UOB—has seen price-to-book valuations climb well above two standard deviations from historical norms, with dividend yields compressing substantially. OCBC’s forecast yield has fallen below 3.5%, and UOB’s below 4.2%. DBS now trades at over 2.4 times book value, well above its historical average of 1.45, while OCBC and UOB trade at around 1.6 and 1.3 times book respectively.
This has prompted DBS analysts Yeo Kee Yan and Foo Fang Boon to note that the STI reached 5,581.37 on August 5, 2026, and they expect banks to enter a correction or consolidation phase during a seasonally weak third quarter.
Where the Value Has Migrated
DBS has identified five themes for rotation in the current environment: value unlocking, AI and technology, high-growth REITs, beneficiaries of higher trading turnover, and stocks with stronger second-half outlooks. The house specifically favours S-REITs, which should benefit from a more stable interest rate outlook, and small and mid-cap stocks that remain in play under the Equity Development Programme.
The Rotation Playbook
For value investors, this concentration creates a tactical opportunity. Rather than chasing expensive bank stocks, the rotation strategy involves identifying quality companies that have lagged the rally despite sound fundamentals. DBS specifically recommends large caps with earnings momentum, stable interest rate beneficiaries, and value-unlocking catalysts.
Small and mid-cap stocks also deserve attention. The daily average trading value for SMCs jumped 155% to S$310 million in FY2026, the highest since FY2014, while institutional net buying in that segment tripled to S$606 million. This suggests that the market is beginning to recognise value beyond the index heavyweights.
The narrowing rally may feel counterintuitive, but for disciplined value investors, it represents a widening opportunity set. The key is patience and selectivity—focusing on companies where the disconnect between price and intrinsic value remains widest.
