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.[SINGAPORE] 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 stock market boosted by the sub-zero rates is overshadowed by the negative implications for the economy and financial system.
Singapore's gross domestic product is expected to shrink 4 per cent to 7 per cent this year, its worst contraction since independence in 1965, as the pandemic pummels the trade-reliant economy. The plunge in money-market rates came as the Monetary Authority of Singapore promised to provide sufficient financial liquidity, while the government has deployed stimulus of S$92.9 billion so far.
"Falling rates and sovereign yields mean that stocks would appear more attractive versus bonds," said Eli Lee, head of investment strategy at Bank of Singapore, cautioning that context is key. But"as we have learned 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 US 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 island nation.
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