Falcon Private Bank tiptoes 'selectively' into emerging market equities

FALCON Private Bank has begun to allocate funds into emerging market (EM) equities "selectively'' even as it keeps a close eye on potential headwinds should the US dollar strengthen.

David Pinkerton, Falcon's chief investment officer, said US dollar strength has been the biggest culprit of the significant outflows and underperformance of EM equities against developed market (DM) stocks over the past four to five years.

"More recently the dollar stopped its ascendancy because of the expectation that a rise in US interest rates is being pushed out ... The major flows that go into EM come from DM pension funds, insurance companies. Local investors don't drive big liquidity flows.''

He added: "We're more optimistic in increasing allocations into EM selectively but into markets where currencies have already depreciated.''

The Institute of International Finance in its April 7 capital flows report noted the "striking turnaround'' in recent EM asset prices and inflows. But it continues to project substantial outflows of US$500 billion from EM in 2016, although this is an improvement from outflows of US$750 billion in 2015.

It said the improvement is driven by a gradual recovery in non-resident capital inflows which are projected to climb from US$240 billion in 2015 to US$560 billion this year. "... but heavy resident capital outflows will still keep overall flows negative,'' it said.

Falcon is a Swiss boutique private bank with assets under management of 15 billion Swiss francs (S$20.9 billion). It has declined to specify Asia's share of its AUM.