SINGAPORE (June 5): In the movie Apocalypse Now, Lieutenant Colonel Kilgore, the hopeless war addict played by Robert Duvall, famously quipped, “I love the smell of napalm in the morning.” Meanwhile, the jungle burns a bright orange behind him.
Singapore’s skies this week seemed sunnier and bluer than usual. With commuter traffic and factories taking hesitant steps to emerge from the “circuit breaker” lockdown on June 2, the air even smelled crisper than normal — or was that a whiff of Lysol?
There were some indications of “green shoots” sprouting from Singapore’s economy. The Purchasing Manager’s Index for May, released on June 3, indicated that while the manufacturing sector is still contracting, it has rebounded off the low of 44.7 points in April to 46.8 points for May.
The hard-hit travel and hospitality industry enjoyed a sliver of good news too. So-called “fast lane” business travel between certain countries, such as China, will be allowed. Flag carrier Singapore Airlines, a sorry sight with its grounded fleet baking in the Australian desert, announced that some flights to popular places like Japan and New Zealand and Hong Kong will resume soon.
The optimism was most visible in the stock market. Investors did not take heed of the old adage “sell in May and go away” and buying momentum gained further strength in the first few trading days of June. The strong surge was especially apparent on June 3 when the Straits Times Index rose 3.3%. Beaten-down big names like SIA and ComfortDelGro (See story on page 22) roared back to life, rising 4.87% and 8.05% in one day. The three local banks DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank posted strong gains too. From the low of March 23, STI has clawed back more than 20%. Technically-speaking, the bull was back.
Yet, the STI was merely playing catch-up. Many other regional markets had already made back the losses — as market valuations and economic fundamentals drifted further apart.
Wall Street, of course, has been extending its rally, never mind that US streets are teeming with protestors, mourning the death of George Floyd at the hands of cops. It seemed the heavy dose of stimulus by the US Federal Reserve far outweighed concerns over police brutality, or, the eye-popping 20% unemployment rate.
“Global financial markets avoided a potentially disastrous systemic event, thanks to the large, timely fiscal and monetary response from US policymakers, emulated by many countries,” says US asset manager BlackRock in its 2H2020 outlook.
However, analysts warn of danger around the corner. “In every sense, this looks like, walks like, and quacks like a true blue ‘risk on’ rally,” says Vishnu Varathan, head of economics and strategy at Mizuho Bank. “A legitimate argument that may be made is that if easing lockdowns restore jobs much sooner, then the economic snapback to normalcy is likely to be lot faster as well; possibly outperforming far gloomier forecasts by the IMF and the Fed,” he adds.
However, Vishnu warns that the markets might grow addicted to the Fed’s limitless support. “Markets are taking a bold bet that the impetus to, and incentives for, keeping stimulus abundant (rather than merely adequate) will be the ‘filler’ needed to plug the valuation gaps from virus uncertainty, US-China tensions and US protests.”
In other words, investors are punting on a V-shaped economic rebound, thanks to quantitative easing. “This is more about (market) mania driven by (stimulus) morphine,” says Vishnu.
In its bid to stem the damage to the economy, the Singapore government is injecting a big dose of stimulus of its own — specifically $92.9 billion worth — and stands ready to do more if required. A large chunk of this unprecedented draw on the national reserves will go towards supporting employment.
But even with the lifting of the circuit breaker measures, higher job losses over the next six to 12 months will be a “major and urgent” challenge, warns senior minister Tharman Shanmugaratnam on June 3.
A “national team” will be making a joint effort to “defend” employment. The government will help support 100,000 jobs of various kinds — including internships and temporary positions — across both the public service and private sectors.
“We must absolutely avoid what we have seen in many other places, where unemployment keeps rising — first to 10%, then higher, and governments and people begin treating that as normal after a while,” warns Tharman.
To the disappointment of employers, the 75% government wage subsidy was not extended for another month, a gentle reminder the government is not one that allows businesses to get too comfortable with handouts.
Just like how the US markets are getting used to Fed’s stimulus at the risk of growing disconnect, prolonged government subsidies — like steroids — can be too much of a good thing. Measured doses are fine, but not an endless gush. If a company is worth its salt, it should focus on getting back to doing what it is good at. And that is what many firms — with engines gunning — intend to do so once the barriers are lifted.
