While a decline in interest rates is generally seen as good for stocks, the benefits of Singapore’s slide towards negative territory are far from certain.
The city-state’s overnight borrowing rate slid to within two basis points of zero last month while the one-month swap offer rate turned negative for the first time in almost nine years.
The relative appeal of the nation’s US$370 billion (S$517 billion) stock market boosted by sub-zero rates is overshadowed by the negative implications for the economy and financial system.
Singapore’s gross domestic product is expected to shrink by between 4 per cent and 7 per cent this year, its worst contraction since independence in 1965, as the Covid-19 pandemic pummels the trade-reliant economy. The plunge in money market rates comes as the Monetary Authority of Singapore promised to provide sufficient financial liquidity, while the Government has deployed stimulus of $92.9 billion so far.
“Falling rates and sovereign yields mean that stocks would appear more attractive versus bonds,” said Mr Eli Lee, head of investment strategy at Bank of Singapore, cautioning that context is key. But “as we have learnt from Japan and Europe, ultra-low rates typically result from policy efforts to combat deflationary pressures and economic headwinds”.
While sub-zero rates have been a reality for years in Europe and Japan, the United States Federal Reserve has consistently opposed them, citing uncertain efficacy and potential damage to the financial system. Some Singapore investors are similarly concerned that steps taken elsewhere may not work for the tiny Republic.
“Negative interest rates would be very detrimental in Singapore given the country’s stock market has high exposure to financials,” said Mr Nader Naeimi, head of dynamic markets at AMP Capital Investors in Sydney.
Mr Naeimi believes that in Japan and Europe, negative rates have crimped bank margins, broken a key channel for the transmission of monetary policy and caused bearish phases in the stock market.
The dive below zero has some silver linings. Singapore stock gauges contain many property stocks, especially real estate investment trusts, which “generally perform well in a low interest rate environment”, said Mr Joel Ng, an analyst at KGI Securities (Singapore).
Singapore is starting to reopen its economy from a pandemic circuit breaker. Containment will be the key issue for share prices, said Mr Paul Sandhu, head of multi-assets quant solutions and client advisory for the Asia-Pacific at BNP Paribas Asset Management.
The Straits Times Index is down about 20 per cent this year and is trading near a record-low valuation of less than 0.9 times book value. Meanwhile, the US$700 million SPDR Straits Times Index ETF is seeing record inflows as stimulus and cheap valuation embolden investors.