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Investing.com -- India and Japan are the top candidates to benefit from a global shift away from U.S. equity dominance, according to Nomura analysts in a note this week, who cited their strong positioning across key investment metrics.
“The world is heavily invested in US economic exceptionalism, and if this narrative is really changing, financial flows could shift substantially,” Nomura’s Global Head of Macro Research recently stated.
The analysts noted that since 2010, foreign investors have bought $3.3 trillion of U.S. equities, bringing their total holdings to about $16.5 trillion, or 17.8% of the U.S. equity market.
Nomura evaluated 46 non-U.S. developed and emerging markets using 24 metrics across five key areas: “Market liquidity/efficiency; Economic/financial fundamentals; Governance and regulation; Risk and stability; and Importance to global markets/economy.”
“Based on our framework, we think India (within EMs) and Japan (within DMs) appear best positioned to capture these reallocation flows, should investors diversify away from the US,” the analysts wrote.
While China technically ranked highest in Nomura’s model, the analysts cautioned that the score “comes with a significant caveat” due to geopolitical risks and incomplete data.
“If (and this is clearly a big if) the US-China relations were to improve meaningfully, we think China could potentially experience unprecedented capital inflows,” wrote Nomura.
By contrast, India and Japan “possess crucial characteristics for absorbing substantial capital flows, i.e. depth (liquidity) and breadth (diverse investment options across their extensive listed universe of stocks),” the report said. ‘
These features are said to “set them apart from many other countries” and suggest they are better equipped to handle large inflows from global investors reallocating away from U.S. markets.