Published June 5, 2009

Beware of the pendulum swinging back

By SIOW LI SEN

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THE stocks of Singapore's three local banks - seen as proxies for the economy - have been rebounding since March in line with global euphoria over what has been hailed as a 'green shoots' recovery. But market sentiment appears to be more cautious lately - a good time for investors to take stock of the situation.

There seem to be a few signs that the Singapore economy may have seen its worst, but it must be noted that the bad news is still piling up.

The purchasing managers index (PMI), a key indicator, rose two points to 51.2 last month - its first expansion after eight months of contraction. The good news is that overall production output expanded for the second month on the back of higher imports and inventory levels. But there was still a sting: overall hiring sentiment remains poor. Manufacturing and electronics employment continued to contract, said Janice Ong, executive director of the Singapore Institute of Purchasing & Materials Management. She added that local manufacturers remain cautious in managing their business activities and they continued to clear their stocks at very low prices last month.

Further indication of poor business sentiment comes from bank loans data; business loans continued to fall, according to the latest official figures. Total bank lending dipped again in April after a slight increase in March, as loans to businesses shrank for the sixth straight month, and lending to the building and construction sector stalled. Loans to businesses fell 1.1 per cent in April to $154 billion, the sixth consecutive monthly decline. From last November to end-April, loans to businesses contracted $92.3 billion - some 5.7 per cent.

Rating agency Standard & Poor's (S&P) in its latest global fixed income report said that corporate defaults in Asia-Pacific so far this year already match 1998's record high.

Meanwhile, the number of downgrades has risen sharply, dominating rating actions for 10 months in a row. S&P said even though Asian companies came into this downturn with generally lower leverage than their Western counterparts, severe disruptions to exports continue to pose stark profitability challenges, particularly in manufacturing and other cyclical sectors. 'We expect record levels of defaults in the coming months as the global recession continues to take a heavy toll on the region's export-led economies and leveraged sectors, with ripple effects on capital spending and consumer expenditures,' said the rating agency.

The government continues to warn of more layoffs with the prime minister this week cautioning against being hasty in thinking the global recession has bottomed. But the stock rally of the three local banks appears to suggest that investors have turned their backs on a relentless diet of bad news because of 'negativity fatigue'.

There is no question that the local banks are well run and, while vulnerable to the contracting economy, their rising levels of non-performing loans are not expected to reach Asian financial crisis levels. Still, investors should remain nimble - because when the pendulum swings back, the effect could be devastating.