RENEWED hopes of an early economic recovery helped to bolster sentiment on the local bourse yesterday.

This was despite a fall in other regional markets, following concerns that China might be looking to curb investments in industries suffering from overcapacity.

In Singapore, the benchmark Straits Times Index (STI) ended 13.8 points higher at 2,642.23.

DBS Group Research said in a report that it now expects Singapore's economy to contract by a smaller 3 per cent, as compared with its previous estimate of a shrinkage of 5 per cent.

It also expects the economy to grow 5.2 per cent next year, instead of the 4.8 per cent it had earlier projected.

Top gainers yesterday included local lenders United Overseas Bank, which rose 14 cents to $17.02, and OCBC Bank, which gained three cents to $8.12.

Economic recovery hopes also underpinned buying interest in property counters. City Developments rose 26 cents to $10.34 and CapitaLand was up four cents at $3.79.

Among other blue chips, SingTel was up three cents at $3.21 while ST Engineering gained four cents to $2.66. StarHub rose three cents to $2.23.

Trading of penny stocks also soared, as traders took up the trading ideas offered to them by analysts.

This caused market volume to hit 3.31 billion shares worth $1.86 billion - the third straight day it has surpassed the three-billion-share mark.

But Royal Bank of Scotland Asia Securities analyst Trevor Kalcic said in a note yesterday that the market might be too rosy in its outlook on the local lenders.

'Consensus growth can only be achieved through a combination of maintaining net interest margins at current high levels, a sharp uptick in loan growth, and sharply lower bad debt charges.'

But he believed that all three drivers of growth might disappoint, as he cut bank earnings' estimates between this year and 2011 by an average 9.8 per cent.

Citigroup yesterday raised its target for STI to 3,000, as it believed that the index would 'overshoot mid-cycle valuations', even though a bull market might 'lack conviction at this point in time'.

'A new bull market will have to count on the success of the two integrated resorts opening early next year, a sharp private investment recovery, and accommodative fiscal and monetary policies for an extended period of time,' it said.

Bull market STI valuations had occurred historically only when GDP growth reached 8 per cent or more. This took place between 1993 and 1996 when the region was experiencing an economic miracle; between 1998 and 1999 when there was an export-led recovery after the Asian financial crisis; and during the investment boom in 2006 and 2007.

But UBS warned in a report that the market might be due for a sizeable correction, after gaining 80 per cent since March. 'The speed and magnitude of the market collapse and the subsequent rally are reminiscent of the Asian financial crisis,' it added. Still, it anticipated STI to reach 2,960 by the end of next year, as it believed that a tightening of monetary policy was unlikely and the economy would not suffer a double-dip recession.

engyeow@sph.com.sg