Equity analysts with Morgan Stanley are forecasting a 14% total return potential for Singapore equities over the next 12 months, citing a bottoming-out of the local economy, low valuations and strong dividend yields.

"In our base case scenario, we see growth driven by a rebound in corporate earnings as the negative impacts of COVID-19 are contained, and economic activity resumes to near normal levels in 2021," the investment bank said in a report as it launched its coverage of Singapore equity strategy.

Last Friday, the city-state lifted most restrictions that had been imposed more than two months ago to curb the spread of the pandemic.

In the report dated June 21, Morgan Stanley set a target of 1,550 for MSCI's Singapore index, which it said implied a 9% upside from current levels, and a 14% total return over 12 months after including dividends.

"We believe valuations have bottomed and a sustained rebound is underway, as the market looks past current economic weakness and shifts its focus to an imminent recovery," said equity analyst Wilson Ng and research associate Derek Chang.

They favoured cyclical recovery plays such as banks, property and consumer staples and sustainable divided stocks.

Morgan Stanley's picks included United Overseas Bank Ltd, City Developments Ltd, agribusiness group Wilmar International Ltd, Ascendas Real Estate Investment Trust and telecoms infrastructure firm Netlink Trust.

The brokerage highlighted that Singapore stocks' dividend yield of 4.5% was the highest in Asia Pacific and across major developed markets globally.

(Reporting by Anshuman Daga, Editing by Sherry Jacob-Phillips)