Singapore goes to the polls: Economy, not votes, key to where STI is heading
An oft-heard quip about Singapore politics is that the winner of the elections is a foregone conclusion, but that the date of the win, and the vote shares garnered, are not. In contrast, the date for US elections is known way in advance but the winner is not.
Now, at least one of the uncertainties has been removed. On July 10, despite worries that the Covid-19 outbreak has yet to be contained, Singapore will go to the polls, so that Prime Minister Lee Hsien Loong can “clear the deck” for his successor-in-waiting, Heng Swee Keat, and go about nursing the economy back to health with a fresh five-year mandate. “The government that you elect will have critical decisions to make,” he explains.
Yet, it is a more difficult task to determine where the Singapore market will head towards amid the hustings. As noted by DBS analysts, Singapore has no track record of a “pre-election rally”. In the last six general elections, there was no specific directional trend exhibited by the Straits Times Index (STI). Rather, the stock market was driven more by macro-economic factors and actual earnings levels.
For example, in the November 2001 snap polls, the strong gain was attributed more to markets clambering up after the crash triggered by the Sept 11 terrorist attacks two months earlier.
In the immediate wake of the 2015 elections, the STI first dropped, then recovered within one month. The markets then were weighed down by a steep correction in oil prices, among other uncertainties.
DBS analysts believe that this year, investors’ focus will stay on the easing from the “circuit breaker” measures — to what extent economic activities will resume. The market will also keep a close watch on the upcoming Q2 earnings reporting season — to see how various companies fared in the quarter amid the sharpest decline in GDP in living memory. “We believe that trading activity will be muted in coming weeks,” they say.
Similarly, CGS-CIMB analyst Lim Siew Khee observes that typically, elections in Singapore have little or no impact on the stock market. For four out of the last six elections, market reactions before and after the event were “muted”. There has been no fine tradition of politically-linked stocks enjoying a lift, unlike in many other countries in the region. “The correlation between Singapore’s general elections and its economy is more spurious,” says Lim. Yet, this year’s elections are happening amid an unprecedented health and economic crisis. “The market could be hungry for positive indicators,” she reasons.
Unfortunately, the world economy at this stage is seen to have more things to worry about. For one, there’s the resurgence of Covid19 new cases in the US as the economy gradually reopens. On June 24, the US reported a record new daily high of new cases in seven states, including the major, populous ones of California and Florida.
According to the Covid Tracking Project, a total of 38,672 people in the US have been reported as having new infections on June 24, prompting a slowdown in the reopening of the US economy. The Dow Jones Industrial Average dropped 2.72% to 25,445.94 points in reaction. Citi Private Bank observes: “The virus itself was back in the news, and rightfully so.”
Just a fortnight ago, markets were betting on a V-shaped recovery. There are now louder warnings that it is preferable to be cautious. On June 24, the International Monetary Fund lowered its forecast for 2020 world GDP to a contraction of 4.9%, from the previous estimate of a 3% decline just three months earlier.
“The Covid-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,” warns the IMF’s chief economist Gita Gopinath. Virtually all economies, both advanced and developing ones, are being hit. Consumption, trade, inflation — the usual string of key indicators — are all expected to become weaker than earlier anticipated.
While next year’s growth is seen at 5.4%, this means the 2021 GDP figure would still be 6.5 percentage points lower than the preCovid-19 forecast of January 2020.
Other experts prefer to maintain their optimism. Credit Suisse recognises that the uncertainty surrounding Covid-19 remains high. However, secondary outbreaks are likely to be contained more rapidly with less economic damage. Citing recent medical studies, Credit Suisse says contagion risks can be managed without complete economic shutdowns, consistent with the experience of many Asian economies.
“The general public has become more cautious; testing and tracing regimes are better established; and healthcare systems are better prepared,” reasons John Woods, chief investment officer, Asia Pacific, at Credit Suisse. “Against this backdrop, recent USD weakness should prove to be a positive factor for Asian equity and credit.”
Credit Suisse believes that substantial monetary stimulus, among other factors, should unlock further upside in the medium term.
As campaigning for the 93 seats in Singapore’s Parliament goes into full swing, the opposition parties will criticise the botched handling of the outbreak in the workers’ dormitories. On the other hand, the ruling party will undoubtedly repeat how the government has been quick to roll out the unprecedented rescue package of nearly $100 billion to steady companies and save jobs. “Singapore has not yet felt the full economic fallout from Covid-19, but it is coming,” warns PM Lee.
Politics aside, businesses are eager to get back to doing what they do, and investors are forever weighing risks versus rewards. At current levels, the odds are somewhat tilted towards the positive. Morgan Stanley, for one, is urging investors to buy Singapore stocks for “sustained recovery”, while Credit Suisse says the stocks are showing “attractive valuation characteristics”.