Foreign exposure to US assets may be lower than feared

Reuters

18 hours ago

ORLANDO, Florida, June 3 (Reuters) - It is widely believed that investors around the world have a disproportionately high exposure to U.S. assets, particularly stocks, an imbalance that could roil U.S. markets if corrected. But what if these fears are overblown?
Several eye-popping statistics suggest that America's weight in world financial markets is even greater than its outsized economic might. Most strikingly, the U.S. net international investment position (NIIP), or foreign investors' holdings of U.S. assets less U.S. investors' holdings of overseas assets, at the end of 2024 was $26 trillion. That's nearly 24% of global GDP, up from 16% only two years earlier, a surge driven by foreigners' insatiable appetite for U.S. equities, mainly "Big Tech".
Demand was so hot that, by some measures, the value of U.S.-listed stocks at the turn of the year represented 74% of total global market cap. That share was 60% six years ago, and less than half in 2011.
But the attractiveness of dollar-denominated assets is now being questioned, as the often erratic policies of U.S. President Donald Trump have upset longstanding economic and geopolitical norms, making governments and investors question whether Washington is still a reliable partner on the global stage.
The concern is that this eroding confidence triggers a reversal of the massive flows into Wall Street seen in recent years that has damaging spillover effects.
Such a correction may not require outright selling. Given the scale of the flows involved, just less buying among foreign investors could be enough to cast a shadow over the world's most important stock market.
And the running assumption is foreign investors don't have the capacity or willingness to increase their exposure to U.S. assets, creating a significant long-term downside risk for Wall Street, Treasuries and the dollar.
"A structural shift is underway: the slow erosion of US economic dominance," analysts at Deutsche Bank wrote on Monday.
But looked at another way, foreign exposure to U.S. assets may not be as high as initially meets the eye. That's the view of analysts at JP Morgan, who measure portfolio investment in U.S. bonds and equities as a share of countries' total household sector financial assets.
They use a broad definition for a country's "household" sector, covering investments by institutions like insurance companies and pension funds that are ultimately made on behalf of households. Using a broad range of data, from central banks, U.S. Treasury and OECD household financial asset flows, they measure the ratio of U.S. equity and bond holdings relative to household financial assets in each country.
They find that "relative to the total financial assets of households in the rest of the world, the allocations to U.S. assets typically stand at around 10-20%." As a result, they are "skeptical of the idea that foreign investors hold too much of U.S. assets."
Given that U.S. equities account for more than 70% of the MSCI global market cap and dollar-denominated bonds represent around 50% of global bond indices, according to JP Morgan estimates, the 10-20% exposure of foreign investors to U.S. assets does appear surprisingly low.
And the 10-20% figure would be even lower were it not for the outsized U.S. equity holdings at the Swiss National Bank and Norway's sovereign wealth fund.
On the bond side, foreigners' footprint in the U.S. Treasury market is shrinking. Data shows that they owned 31% of the $28.55 trillion outstanding Treasury debt at the end of last year. That share has been declining steadily since the Global Financial Crisis. In 2008, the figure was approaching 60%.
Overseas investors' share of the T-bill market has shrunk even more. In December, it was under 20%, near its lowest level on record and sharply down from 50% a decade before.
Nikolaos Panigirtzoglou and his team at JP Morgan aren't arguing investors will or should ramp up their purchases of U.S. assets. And in cases where allocations are high - such as the Taiwanese exposure to U.S. bonds or Canadians' holdings of U.S. stocks - diversification would hardly be a surprise.
But there is "little indication" of broad-based selling of U.S. assets by foreign investors so far this year, they note. And if that selling does materialize, it may be far lighter than many expect.
(The opinions expressed here are those of the author, a columnist for Reuters)