Global capital flows and the great rotation into emerging markets

A STRUCTURAL reversal in global capital allocation away from US assets now appears to be underway.

- NATHAN CHANDLER

We expect this to weaken the US dollar and provide significant support to emerging markets, which are increasingly well-positioned to benefit from this rebalancing in global portfolio flows.

The world is overexposed to US assets. Since the global financial crisis in 2008, the allocation of US assets in global investment portfolios has increased rapidly, reaching extreme levels.

Although this trend has been recognised as unsustainable for some time, a combination of key factors has continued to reinforce it.

These include large fiscal deficits in the post-Covid period, persistent weakness in eurozone growth, the dominance of the US technology sector, and a prolonged period of elevated interest rates in the US.

These dynamics pushed US equities higher and strengthened the dollar, despite the widening US twin deficits, leading to a deeply negative and expanding net international investment position.