By Mike Dolan
LONDON (Reuters) – The extreme global investor bias for all things American may not need to end with some major U.S. shock, but could eventually reverse with just a modest lifting of the pervasive gloom surrounding Europe.
Many experts are wary of the scale with which the U.S. is hoovering up global investment and the resulting strength of the dollar. This is raising fears that any missteps stateside could cause a sudden reversal of these gigantic cross-border flows.
But the majority of those flows are coming from other rich economies, mostly in Europe. So the lack of a compelling case to stay at home is arguably as big a driver of the yawning geographic investment imbalances as the magnetic pull of Wall Street.
Few question the attractions of the U.S. – impressively brisk growth, giant tech investment drivers, rising productivity and now, with the return of Donald Trump to the White House, a new round of deregulation to boot.
Spurring this momentum is both the greater liquidity of U.S. markets compared to their foreign peers and the ever rising U.S. share of supposedly ‘diversified’ global equity and bond indexes. Indeed, U.S. stocks now make up two thirds of MSCI’s all-country equity basket..
But the sheer scale of negativity surrounding the economic outlook beyond U.S. shores, especially in Europe, is a major driver keeping European money moving across the Atlantic and U.S. investors at home.
To be sure, Trump’s threatened trade wars and ‘America First’ investment agenda has much to do with keeping those clouds thick and dark overseas.
The mood at the World Economic Forum on Davos this week spoke to that.
“You meet the Americans, (it’s) a real party. You meet the Europeans, it is like at a funeral,” the chief executive of Norway’s $1.8 trillion sovereign wealth fund Nicolai Tangen said of his meeting with other CEOs.
BALLOONING NIIP
The latest official U.S. net international investment position (NIIP), which measures the difference between the value of U.S. investment overseas against that of foreign holdings of U.S. securities, showed a record gap of $23.6 trillion at the end of the third quarter of 2024.
This figure shows net overseas holdings of U.S. assets – U.S. liabilities to the rest of the world – at some 90% of the country’s estimated full year gross domestic product in 2024. And the value of foreign holdings of U.S. assets has almost doubled to more than $60 trillion over the past decade.
The explosion of the NIIP gap is partly due to the scale of price outperformance of U.S. securities over foreign securities held by U.S investors. The dollar’s rising exchange rate is also playing a role. But, even more importantly, the underlying flows just keep coming.
The Bureau of Economic Statistics last month said that additional foreign purchases of U.S. debt and equity securities in the third quarter of last year alone amounted to some $717 billion, stripping out valuation effects.
Where does all the money keep coming from?
One big player stands out. Germany overtook Japan last year as the world’s largest net outward investor, with its contrasting NIIP surplus now soaring above $3 trillion to more than 70% of German GDP and double the share it recorded only a decade ago.
So much so, the entire euro zone NIIP flipped into net surplus for the first time two years ago.
As a share of GDP, Switzerland is another big outward investor – in part due to the Swiss National Bank’s near $1 trillion reserve pile. Sweden’s ranking is rising too.
“STUPIDLY BIG”
Societe Generale (OTC:) strategist Kit Juckes described the U.S. NIIP deficit at $23 trillion as a “stupidly big number” that raises reasonable questions about its long-term sustainability.
“If this transpires to be some form of bubble in the U.S. equity market, I struggle to believe $23 trillion is just going to go back to $21.5 trillion. When it re-balances it’s going to be a very big move indeed.”
But Juckes noted that a major driver of the imbalances was the fact that European investors can’t find anything more attractive at home. If this perspective changes, the massive bias toward U.S. markets could possibly ‘lighten up’.
To that effect, the new year has provided some shards of light. Euro zone stocks have actually outperformed U.S. indexes two-to-one in dollar terms for the year so far. Drawing funds interest in the extremity of the Transatlantic valuation gap, it’s a notable rarity over any timeline recently.
Meanwhile, Bank of America’s latest fund manager survey revealed this week that global funds recorded the second largest allocation to European stocks in a quarter of a century.
A flash in the pan or a portent of things to come?
Ironically, Trump may hold the keys to that. If successful, his push for an end to the war in Ukraine could do much to lift the mood on the eastern side of the Atlantic. Backing away from tariff hikes on Europe would obviously be another major relief for the continent.
Germany’s election next month could also possibly generate more optimism, if the outcome signals that there will be a review of the country’s draconian public spending limit.
Valuations in the U.S. and investor positioning are already at extremes. All that may be needed is a trigger and a narrative.
The opinions expressed here are those of the author, a columnist for Reuters.
