American investors moving to new markets

American investors appear to be moving from the largest economy in the world. For many years now, the United States has remained the go-to investment destination. The dollar was strong and dividends in dollar are attractive. But there is a change in the trend.

Domiciled investors, that is foreign investors settled in the US, have pulled out $75 billion in the last six months, of which $52 billion were in the last two months. The two major emerging market economies that benefited from the flight of capital from the US are South Korea and Brazil. While South Korea got $2.8 billion, Brazil received $1.2 billion.

The flight of capital from the US is happening at a time when the dollar has grown weak, and buying foreign assets with a weak dollar means paying more for less. The value of the dollar has declined by 10 per cent ever since Donald Trump returned as president. There has also been apprehension about the soaring value of tech stocks connected with AI that they are being overvalued, and there is less to show for its profitability in real economic transactions. Investors are keen to put their money in hard economy assets in industry-based economies like Germany and Japan.

The sentiment of the investors in America is reflected in the Bank of America’s fund manager survey which showed investors switching from equities in the US to offshore equity markets. Says Gerry Flower, global private manager, UBS’ European equity strategy and global equity strategy, “I’ve had lots of conversations with our wealth business in the US this year. They’re all talking about investing more offshore because at the end of the year, they looked at the performance of foreign markets in dollar terms and they’re like, wow, I’m missing out.”

The growth numbers of market indexes bears this out. While the Standard and Poor’s 500 in New York grew 14 per cent, Tokyo’s Nikkei shot up 43 per cent, Europe’s STOXX 600 rose by 26 per cent and Shanghai’s CSI 300 went up 23 per cent and Seoul’s KOSPI doubled its value.

This does not mean that the fall of the American economy is now sealed. This is part of the market fluctuation, and the American market is experiencing one of its lows. It is sure to recover. But the tariff turmoil unleashed by Trump has to be controlled.

What is worrying investors in America is uncertainty. There is no greater market dampener than uncertainty. While the US Supreme Court judgment says that Trump cannot hike tariffs in the form of an executive order, and without going through the Congress for passing tax legislation, Trump himself has not been consistent in his tariff decision. He has been raising and lowering tariffs with dramatic swiftness, and it has sent out confusing signals.

The American market will remain an important factor in the global economy because it is the largest spender and buyer compared to the rest of the world. That of course makes America the most indebted country. But it props up global economic engines of growth.

China’s exports have depended hugely on America, apart from Europe. The last year, because of Trump’s tariffs, China’s exports to America have declined but China found alternative export destinations in south-east Asia. But south-east Asian economies would not be able to absorb the exports of China the way America can. The south-east Asian markets are smaller in comparison to that of America.

There is however need for course correction in American tariff policy as well as in its economy. Artificial Intelligence (AI) is the new economic and technological frontier for America. But it will have to diversify its economy.