Recovery in global economic activity could be positive for Singapore stocks

AT THE beginning of the year, widespread expectation that elections would soon be called had many people expecting the Singapore government to roll out a generous Budget.

Then came Covid-19 and the most frightening collapse in economic activity that any of us had ever seen.

In response, the government pulled out all the stops. The aptly-named Unity budget, along with the three supplementary budgets that followed it - dubbed Resilience, Solidarity and Fortitude - set aside nearly S$93 billion to support the country through this unprecedented crisis.

Not bad for an election-year budget.

Singapore wasn't alone in digging deep into its pockets, but it was among the most aggressive in the region. The support measures it introduced were equivalent to about 19.2 per cent of gross domestic product (GDP). According to a report by Morgan Stanley, Asian nations (excluding Japan) have announced support measures equivalent to 9 per cent of GDP to offset the economic fallout of Covid-19.

These measures were rolled out amid great uncertainty and worry, not least with the nature of Covid-19 itself and what it would take to bring it under control. Policymakers around the world were, quite sensibly, preparing for the worst possible outcomes.

Since then, many countries around the world, including Singapore, have become confident enough to re-open their economies. It is likely to be an uneven process, with setbacks along the way.

Last week, in the wake of surging Covid-19 cases, the US states of Texas and Florida ordered bars to close again and imposed more restrictions on restaurants. In Singapore, restaurants that failed to ensure safe-management practices when they re-opened have been closed again.

Yet, even if the effort to contain Covid-19 isn't likely to end any time soon, it does appear to have moved on to a new phase. Against that backdrop, the market has shifted from worrying about the economic slump caused by Covid-19 to sizing up the potential recovery that might now be unfolding if the process of re-opening continues.

Watch US unemployment

Earlier this month, the US Bureau of Labor Statistics (BLS) surprised everyone when it reported that US non-farm payroll employment rose by 2.5 million in May, and the unemployment rate declined to 13.3 per cent.

"These improvements in the labour market reflected a limited resumption of economic activity that had been curtailed in March and April due to the Covid-19 pandemic and efforts to contain it," the BLS said. "In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade."

Some economists had reportedly been expecting unemployment in May to rise to 19 per cent. In April, US non-farm payroll employment fell by 20.5 million, and the rate of US unemployment rose to a post-World War II high of 14.7 per cent.

The turnaround was such a shock that some commentators came up with theories as to why the unemployment data might not be providing a true picture of the US economy. One argument was that many workers who were furloughed had listed themselves as employed but absent from work.

Another theory was that the US government had rolled out measures to support small businesses and jobs that resulted in many people getting paid even if they did not work, meaning that they would have been counted as employed.

These arguments do not detract from the fact that lifting restrictions to contain Covid-19 and allowing people to go about their business is going to quickly boost economic activity.

The BLS is scheduled to release the unemployment rate for June later this week.

Opportunities and threats

Of course, some segments of the global economy will probably not be opened for a long time. For instance, companies in the travel and tourism field might find that they have no choice but to permanently lay off staff.

At the other end of the spectrum, some businesses may well see improved productivity as a result of Covid-19. For instance, retail banks have anecdotally seen increased use of their digital channels during the temporary closure of their branches, presumably driven by customers who were late adopters of technology. This could allow the banks to redeploy their staff, and grow without adding as much headcount as might have needed in the past.

Between these two extremes are a host of industries for which Covid-19 presents opportunities as well as threats. For instance, restaurants that now have to observe safe-distancing rules might not be able to generate as much revenue as they once did, but they could attempt to develop new customers by introducing home delivery services.

It is perhaps little wonder that policymakers across the region, including Singapore, see the leveraging of technology to be an important element of their post-Covid-19 strategies.

Bet on Singapore?

So, what should investors do in this environment?

The rebound that global stocks have staged since late March hews closely to the old adages that bear markets die on bad news and that bull markets climb a wall of worry. Few thought it possible for the market to keep rising as economic activity crumbled.

In the past month, however, market sentiment has turned more positive. In particular, the big sell-off in the second week of June, partly on concerns of a "second wave" of Covid-19 infections, was met with a barrage of soothing commentary from analysts. Could it be that we are now poised at the top of a proverbial slope of hope?

My instinct is to advise caution in the short term. Yet, with efforts to lift Covid-19 restrictions around the world, it seems very likely that economic activity will recover strongly in the weeks and months ahead. Investors might profit from this if they were strategically positioned in high-quality, cyclically-oriented stocks.

Indeed, this might be the right time to begin gradually accumulating Singapore stocks. Given that the Singapore economy is highly sensitive to global growth, and that the largest locally-listed companies tend to have big regional or global footprints, it seems reasonable to expect the local market to perform well as global economic activity picks up.

The benchmark Straits Times Index has also been something of a laggard in the rebound since March. It is currently nearly 20 per cent below where it was at the beginning of the year, and almost all of its 30 components are down year-to-date.

On top of that, Singapore companies have a reputation for being generous dividend payers, which could be important for income-oriented investors in this era of low interest rates. While waiting for a recovery, there's nothing better than getting a payout or two from your stock portfolio as well as your government.