US Fed's stimulus rollback may cause choppy markets, but impact will be limited: Piyush Gupta

Mr Piyush Gupta, chief executive of DBS, at the release of the bank's first-quarter financial results on May 2, 2017.
Mr Piyush Gupta, chief executive of DBS, at the release of the bank's first-quarter financial results on May 2, 2017.ST PHOTO: FELINE LIM

SINGAPORE - Financial markets may see some choppiness when the United States Federal Reserve starts to roll back its stimulus programme, but the impact may not be as big as feared, DBS Group Holdings chief executive Piyush Gupta said on Friday (July 7).

For one thing, it will take at least five years to shrink down to about 30 per cent of the balance sheet, said Mr Gupta while speaking at DBS Private Bank's second half 2017 market outlook luncheon event.

"Second, a lot of the cash reserves or the Fed balance sheet equivalent is actually lying in cash with the US central bank... Money (supply) will shrink, but it won't create a big liquidity squeeze in markets," he added.

Interest rates will go up, but not that sharply because inflation will likely remain low as wage growth is not strong, he added.

Mr Gupta's speech at the annual event comes after the US central bank discussed the possibility of starting the process of unwinding its US$4.5-trillion (S$6.2-trillion) balance sheet this year. Minutes from its June 13 - 14 meeting released in Washington on Wednesday showed that its debate highlighted divisions over the timing of roll off and unease at recent weak readings on inflation.

Fed chair Janet Yellen is trying to manage an exit from unprecedented policy stimulus without slowing growth or causing the bond markets to roil.

On being asked about the impact of the Fed's decision on regional financial markets, Mr Gupta told The Straits Times that he remains positive on stocks in the region, 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 bank stock prices, he added.

Speaking on the occasion, DBS chief investment officer of its consumer banking unit, Mr Lim Say Boon, reiterated on staying invested in assets, including 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."