Citigroup said the Straits Times Index is currently at a forward price-earnings ratio of 13.5 times, near the normal support level of 13.0 times, while based on trailing price-to-book, the STI is trading at 1.25 times.
"These valuation levels are unfairly pricing in a mild recessionary outlook, given our GDP expectations of 3.6 percent this year," Citi said.
On Friday, the STI was down 0.5 percent at 2,745.49 points. The index has fallen 9.6 percent from its year-high of 3,035.78 in March, paring year-to-date gains to 3.7 percent, as investors worried by Europe's debt crisis and slowing global growth flee riskier assets.
But Citi said the near-time upside for the STI is more moderate due to concerns about China and the euro zone, ongoing wage and economic restructuring in Singapore, as well as issues over the city-state's ability to further grow through immigration.
With the STI reaching similar lows as in the fourth quarter of 2011, Citi reiterated that there are opportunities in stocks like Keppel Corp, Hongkong Land Holdings, Oversea-Chinese Banking Corp and Noble Group .
In the small and mid-cap space, Citi likes STX OSV Holdings and Venture Corp.
It advised trimming stocks such as COSCO Corp Singapore , Tiger Airways Holdings and Singapore Exchange.
It also said commodity and commodity-related stocks have been "extremely weak", dampened by elevated costs and price turbulence across the segment, with some valuations already reaching similar levels to those seen during the global financial crisis.
1156 (0356 GMT) (Reporting by Eveline Danubrata in Singapore; firstname.lastname@example.org)