Financial markets may see some choppiness as the United States Federal Reserve starts to reduce its US$4.5 trillion (S$6.2 trillion) balance sheet, DBS Group chief executive Piyush Gupta said.
The Fed's balance sheet has been bloated by years of asset purchases designed as stimulus, but the impact of the reduction may not be as big as feared, he added.
For one thing, it will take at least five years to shrink the Fed balance sheet to about US$2.5 trillion to US$3 trillion, and that will still be about three times larger than in 2007, Mr Gupta said at DBS Private Bank's second half 2017 market outlook luncheon yesterday.
"Second, the cash reserve balances of the Fed are extraordinarily high. As the Fed starts reducing its purchase of treasury bonds, there is ample capacity in the system to take up some of those treasuries ... It won't create a big liquidity squeeze in markets," he added.
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Interest rates will go up, but not that sharply, he said. "I'm confident you are not going to see interest rates going back to the 4 per cent normal. In fact, it may even be a struggle to get to 3 per cent."
That is because inflation will likely remain subdued as wage growth, a big driver, has not picked up much, he said.
Geopolitical uncertainty and price erosion caused by technology changes and disruption will likely keep inflation benign too, he said.
RATES BACK TO 4%? PROBABLY NOT
I'm confident you are not going to see interest rates going back to the 4 per cent normal. In fact,it may even be a struggle to get to 3 per cent.
DBS GROUP CHIEF EXECUTIVE PIYUSH GUPTA , saying Interest rates will go up, but not that sharply.
Mr Gupta's speech came after the US central bank discussed the possibility of starting the process of unwinding its balance sheet this year. Minutes from its June 13-14 meeting released on Wednesday showed its debate highlighted divisions over the timing of roll-off and unease at recent weak inflation data.
Central banks' plans to exit ultra-loose policies are being closely watched. Fed chair Janet Yellen is trying to manage an exit without slowing growth or causing the bond markets to roil.
But the biggest reverberations were felt in the debt markets of developing countries, in an echo of the turmoil emerging markets suffered when the Fed began contemplating its own quantitative easing programme in 2013.
Asked about the impact of the Fed's move on regional financial markets, Mr Gupta told The Straits Times he remains positive on regional stocks, including those on the Straits Times Index. "Bank stocks have run up a lot around the world, but there is still some room for bank stocks to go," he said.
"From an industry standpoint, local banks have gone up, but their earnings growth continues to be reasonably good. And if their earnings growth delivers, then you should continue to get commensurate increase" in their stock prices.
Also speaking at the event, DBS' chief investment officer of its consumer banking unit, Mr Lim Say Boon, reiterated staying invested in assets, particularly those in Asia-Pacific ex Japan emerging markets. "Hoarding cash will be a very long drawn-out and expensive exercise, simply because a recession is not imminent."