Investing.com -- Foreign ownership of U.S. assets has surged over the past decade, but the scale and implications of that exposure are only now coming into sharper focus.
Deutsche Bank analysts digs into the numbers and warns that the rest of the world, especially Europe, may be sitting on outsized, and potentially risky, positions in American markets.
Foreigners currently hold $7 trillion in U.S. fixed income and $18 trillion in equities. Since 2010, that’s an increase of $3 trillion and $15 trillion respectively.
But the key point, according to Deutsche Bank, is that “a remarkable 90% can be accounted for by the appreciation in underlying US asset values rather than fresh flows.”
In other words, foreign portfolios have become increasingly weighted toward the U.S. largely because U.S. markets have boomed, not because investors have been consciously reallocating.
To get a clearer sense of exposure, Deutsche Bank turns to relative portfolio size. In Europe, U.S. assets made up about 5% of total portfolios in 2010.
By 2024, that share had climbed to 20%. In Japan, the rise was from 8% to 16%. “The share of total US portfolio holdings has quadrupled in Europe,” the analysts said, with most of the shift concentrated in equities.
This rise has broadly tracked the growing weight of U.S. markets globally. As the U.S. share of global equities and bonds increased, foreign holdings followed suit, in many cases passively.
The brokerage offers two interpretations: “The more benign interpretation is that foreigners have merely passively tracked rising aggregate valuations... The more worrying interpretation is that this has left foreigners - especially Europeans - with a huge overweight in their portfolios relative to history, especially in US equity markets which tend to be currency unhedged.”
That unhedged exposure, particularly in equities, is what Deutsche Bank flags as a key vulnerability.
Data on currency hedging is sparse, but the report points to available figures from Japan, Sweden, and the euro area that suggest “outright unhedged FX exposure to the stock of US assets is very high.”
The risk is not theoretical. “A sustained shift in foreign investor USD allocation closer to historical norms has the potential to generate huge negative dollar flows,” the brokerage said.
That kind of rebalancing, if it materializes, could have broad consequences for the dollar and global markets.