This tiny stock market is rocking it

The Singapore Stock Exchange (SGX)
Bryan van der Beek | Bloomberg | Getty Images

Singapore stocks are trading at their highest level in almost a year and having lagged regional peers, analysts say the market now has the potential to gain the upper hand.

The benchmark Straits Times Index has climbed almost 12 percent since hitting its lowest level in more than a year in early February. Last Thursday, the market rose to its highest level in almost a year, boosted in part by merger and acquisition activity.

Last week, a unit of Chinese e-commerce giant Alibaba announced plans to buy a minority stake in Singapore Post for $249 million to help set up an global e-commerce logistics business. That news boosted SingPost shares to a record high.

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"If you look at the ASEAN markets as a whole, they have actually done pretty well," said Audrey Goh, investment strategist at Standard Chartered Bank in Singapore, referring to the Association of Southeast Asian Nations.

"Singapore does have the potential to outperform, it is one of the higher-yielding markets," she added.

On a year-to-date comparison, Singapore's stock index is up about 3.4 percent. That leaves it behind double-digit gains in Southeast Asian peers Indonesia and the Philippines, and a rise of about 8 percent in Thailand. Neighboring Malaysia's stock index is up just 0.5 percent.

Morgan Stanley ASEAN strategist Hozefa Topiwalla recommends Singapore as his most-preferred ASEAN market given its defensive nature.

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In a note published last week, analysts at Morgan Stanley said they have upgraded their position on Singapore stocks to overweight.

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Reasons for the more upbeat view on stocks in one of Asia's biggest financial hubs included a stabilizing in economic growth and limited downside risk for corporate earnings.

Singapore's economy grew 4.9 percent on year in the first quarter. Morgan Stanley expects full-year growth to come in at 3.9 percent, similar to last year's pace and picking up to 4 percent next year.

"Singapore is relatively better placed compared to Indonesia and Thailand, where a significant growth deceleration is expected," Morgan Stanley said in the note.

In terms of corporate earnings, Goh at Standard Chartered said strong earnings from banks may have helped boost sentiment towards the Singapore stock market.

DBS, the island's biggest bank, in late April unveiled a record core net profit of S$1.033 billion ($823 million) for the first three months of 2014, up from S$950 million in the same period a year before.

Read MoreDBS net profit up 9%, beats expectations

"Banks are one of the largest components of the stock index so in the case of Singapore banks, a higher interest rate outlook, especially in the U.S. is favorable," Goh said.