(The opinions expressed here are those of the author, a columnist for Reuters)

ORLANDO, Florida - As the first quarter draws to a close, financial markets are at a crossroads. We could be seeing the early stages of a tectonic shift in global investment flows, with a dramatic decline in demand for U.S. assets from abroad. But it's also possible that this is simply a pause and that the 'U.S. exceptionalism' narrative has more chapters to go.

Net sales of U.S. equities by foreign central banks reached $28 billion in January, and net sales of all U.S. assets by the private sector totaled $74.8 billion, according to official Treasury International Capital flows data.

These were, respectively, the fastest-ever pace of U.S. equity selling by the official sector in a single month, and the biggest monthly outflow of U.S. assets by private sector investors in a year.

This abrupt reversal in flows goes a long way to explaining the eye-opening underperformance of U.S. stocks against the rest of the world so far this year. This gap has approached 15 percentage points in the past few weeks.

Of course, one month does not a trend make, and it will take many more months of similar flows to reverse the tide – or more accurately, the tsunami - of foreign capital that flooded into U.S. markets in recent years.

TIC data shows that private sector net capital inflows into U.S. stocks and bonds last year totaled $980 billion, following a net inflow of $668 billion the year before and $1.6 trillion in 2022. That's net purchases from overseas investors and net selling of foreign assets by U.S. investors.

The total figure is worth repeating. In the last three calendar years, private sector investors poured a net $3.25 trillion into U.S. assets. Little wonder that foreign investors at the end of last year owned 18% of U.S. stocks, according to Goldman Sachs. That's a record-high share going back to 1945.

At an average of more than $1 trillion a year, that pace of net inflows was unlikely to be maintained. But does that mean that January's pace of selling will persist? Not necessarily.

PARADIGM SHIFT?

Goldman Sachs' chief U.S. equity strategist David Kostin and his team estimate that foreign investors will remain buyers of U.S. equities this year, lured by the weaker dollar, attractive prices due to the recent correction, and the unparalleled liquidity of U.S. markets.

They reckon overseas investors will be just as committed this year as they were last year, buying a net $300 billion compared with $304 billion in 2024. They do note, however, that "elevated political and economic uncertainty also create elevated uncertainty around that forecast."

Appetite for U.S. assets will remain strong as long the U.S. maintains an innovation-friendly tax system, flexible financial system, commitment to property rights and a relatively low regulatory burden, agrees Standard Chartered's head of G10 FX strategy Steven Englander.

"Cyclical ups and downs in equity and other asset prices would not erase this attractiveness in the long term, even if the correction in U.S. equities continues, provided the underlying positives remain in place," he says.

It is important to note that TIC flows reports are released with a lag, meaning January's outflows don't account for the notable market shifts seen in recent weeks. The February and March reports could show massive outflows too.

There are good reasons why foreign investors have backed away from U.S. assets in recent weeks - stretched valuations, market concentration, the emergence of China's DeepSeek artificial intelligence model, Germany's watershed fiscal U-turn, and concern surrounding the Trump administration's trade and foreign policy agendas.

This is all to say it remains unclear whether the recent shift in investment flows is temporary or represents a true paradigm shift. The next few months will be critical.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Nia Williams)


Reuters