Professional investors are slowly waking up to realize that by chance, their exposure to the United States is extremely high and they are unsure of the way back.
As long as anyone who makes a living by making a living is in this game, U.S. stocks have been a natural destination for foreign investors, and loading in the UK, Europe, Japan or emerging markets has been considered a bolder call.
“When you don’t know where to go, the United States is the choice,” said Fabiana Fedeli, chief investment officer of M&G Investments. “In the past, no one would have lost his job due to distribution to the United States.”
Those days have passed because of almost too obvious to access. Over the years, other countries have conducted unorthodox experiments in the rule of law and monetary policy (Turkey) or trade and fiscal policy (UK) with the consequences of the market. But this time, the U.S. is performing fast, loose, and unfortunately, it takes up a larger slice of the average institutional investor portfolio.
As a result, the key conversations in asset management now revolve around the new “neutral” levels. What's this? Is there too much exposure in the United States?
For those who are concerned about the political risks in the United States, the starting point is not good. The major global equity index in developed markets, which many investors either use as a benchmark or track directly using passive instruments, but about 70% of the funds entered the U.S. based on the size of the underlying company.
As long as the United States is stable, predictable, and has achieved stable returns for years. When these advanced rewards (technical fields) engines are arguably the biggest long-term beneficiaries of globalization, the country’s president is now working to dismantle the biggest long-term beneficiaries of globalization. Overseas competitors have made some progress in catching up. Policy dysfunction and institutional erosion in the United States are the icing on the cake.
Ironically, European investors have been particularly enthusiastic about the theme of American exceptionalism over the years. Perhaps they were close to those who unified European regulations pushed them to the whole Atlantic Ocean to and from the coast. "If you were beaten 10 times in Europe (in Europe), you wouldn't think it was at the end of the tunnel," said Kokou Agbo Bloua, head of economics, cross-distribution and Quant Research. "You would think it was a train."
But the mood has changed now, especially since the brief and keen market automatically swing last summer, highlighting the concentrated exposure in the United States. French banks are outlining what we call “huge rotation” in what we call “big rotation” assets and how it can be eliminated in the coming years.
The early stages of this situation have already happened, and as George Saravelos of Deutsche Bank said, it is "not pretty" for the United States. "So far, liquid evidence shows that U.S. capital inflows are very rapid and, at worst, continued aggressive investment in U.S. assets," he said in a report this week. Foreign investors are in the midst of a “buyer strike” watching the flow in exchange-traded funds.
So far, this is just the tip of the iceberg. But if 70% park too much in the US, what is the correct number?
Fedeli of M&G Investments said her clients in Europe and Asia are actively raising the question, not about whether they should be redistributed, but how. She added that U.S. investors are more “domestic”. In my experience, Americans generally optimistic Americans generally believe that normal services in the market will soon resume - I don't believe it.
In theory, it makes sense to have a better consistency in the contribution of different countries to global GDP. “For me, it’s the end,” Federley said. But this will involve squeezing the U.S. to 25% distribution, which may be 30 if you strip some Chinese slices to explain the poor accessibility of the market. "It's unlikely that I'm going to be 30% in my life," she said. I didn't ask her age, and of course, it shouldn't be, but my grandmother turned 102 this year and she's great physically and mentally, so this could happen in my life. But we digress.
As Socgen calculates the share of global revenue from the country, the U.S. right could drop by about 55%, which does exceed its weight. Perhaps more to illustrate the superior depth and liquidity of the U.S. market.
This shift won't happen overnight, and no one expects it to come from a huge sell-off of U.S. assets. But, with new funds investing, the rest of the world may grab a bigger slice.
Large institutional investors are not Flinty’s fast-moving hedge funds or retail funds. They are huge supervans moving slowly and in an orderly manner, but with big waves. Slanting their balance in Europe and Asia and away from the more familiar ground in the United States, even just a little bit, marks a redesign of the global market. For many, the United States has become a risky bet.
katie.martin@ft.com