Podcast Summary: "Are Foreign Investors Fleeing U.S. Assets?"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode Title: Are Foreign Investors Fleeing U.S. Assets?
• Release Date: July 9, 2025

Introduction

In the July 9, 2025 episode of Morgan Stanley's "Thoughts on the Market," Serena Tang, Chief Cross Asset Strategist, delves into a pressing question facing U.S. financial markets: Are foreign investors withdrawing their investments from U.S. assets? This analysis explores recent trends in global investment flows, assesses the demand for U.S. equities, and examines where capital is being redirected amidst ongoing uncertainties surrounding U.S. trade and tariff policies.

U.S. Equity Market at an All-Time High Amid Uncertainty

Serena Tang opens the discussion by highlighting a paradox in the current market landscape. While the U.S. equity market has "reached an all-time high," it is simultaneously grappling with "lingering uncertainty about U.S. trade and tariff policies" (00:10). This environment creates a complex scenario for global investors who must weigh the robust performance of U.S. stocks against potential policy risks that could impact their investment returns.

Understanding Fund Flows and Investor Sentiment

Fund flows are a crucial indicator of investor sentiment and market trends, representing the net movement of money into and out of investment vehicles such as mutual funds and ETFs. Serena explains, "Fund flows... are an important gauge of investor sentiment and market trends" (00:45).

Recent high-frequency data indicates a decline in demand for U.S. stocks, leading some to question whether foreign investors are indeed pulling out of U.S. assets. However, Serena cautions against drawing definitive conclusions, stating, "the idea is exaggerated" (02:15). She emphasizes that varying data sources and frequencies across different market segments can yield conflicting interpretations, making it challenging to ascertain a clear-cut trend.

Analyzing Fund Flow Data

Global Equity, ETF, and Mutual Fund Trends

Serena references weekly data from Lipper, revealing that international investors remained net buyers of U.S. equities through most of April and May. However, the pace of buying has "slowed year to date versus 2024" (01:15). Importantly, current fund flows remain "much higher than during the same period in 2021 through 2023" (01:25), suggesting that while there is a slowdown, the demand for U.S. stocks has not plummeted to previous lows.

Treasury TIC Data Insights

Complementing the fund flow analysis, Treasury TIC (Trade and Investment Center) data indicates a slowdown in foreign demand for U.S. assets, albeit without significant net selling. This nuance suggests that while foreign investors may be cautious, they are not actively divesting from U.S. equities en masse.

Shift of Capital to Global Markets: Europe Takes the Lead

One of the most significant findings discussed is the redirection of nearly US$37 billion into Europe-focused equity funds year-to-date (03:00). This substantial inflow marks Europe as the biggest beneficiary of the decreasing flows to the U.S., surpassing the investment rates of previous five years.

Moreover, Serena points out that year-to-date flows into European ETFs and mutual funds have "dominated those targeting Japan and emerging markets" (03:30). This trend underscores Europe's emergence as the premier destination for equity fund flows, with minimal spillover into other regional markets. The attractiveness of European markets could be attributed to various factors, including economic stability, growth prospects, and favorable policy environments compared to the uncertainties surrounding U.S. assets.

Allocation Data: Portfolio Shifts Without Major Reallocations

Interestingly, Serena notes that these shifts in fund flows have not yet manifested significantly in allocation data, which tracks how global asset managers distribute investments across different regions. Global equity funds have increased their portfolio weights to the rest of the world by approximately the same amount as allocations to the U.S. have decreased.

She elucidates, "allocation to the US has actually gone down by roughly the same amount as its share in global equity indices" (04:10). This indicates that the reduction in U.S. allocations is proportionate to the declining weight of the U.S. in global equity indices, rather than a strategic divestment driven by investor sentiment.

Furthermore, an estimated US$9 billion has flowed into international equity funds that exclude U.S. stocks altogether (04:20). While this figure may seem modest in absolute terms, when scaled relative to the size of fund assets, it represents the highest net flows international equities have seen. This suggests a segment of investors is opting to diversify away from U.S. equities entirely, seeking opportunities in other markets.

Future Outlook: Continued Demand Amid Policy Uncertainty

Looking ahead, Serena opines that these trends are unlikely to reverse as long as "lingering policy uncertainty dampens demand for U.S.-based assets" (05:15). However, she maintains a balanced perspective by acknowledging that "there are very few alternative markets to the U.S. dollar markets right now". This limited availability of alternatives implies that while some funds are reallocating towards regions like Europe, the U.S. will likely continue to attract investment, albeit at a potentially slower pace.

Additionally, while U.S. stocks may experience "less marginal flows from foreign investors to the benefit of the rest of the world equities, especially Europe", funds are unlikely to completely divest from U.S. assets within the next 12 months. Serena underscores the resilience of U.S. markets, suggesting that their foundational strengths will continue to support investor interest despite the current shifts in fund flows.

Conclusion

The July 9th episode of "Thoughts on the Market" presents a nuanced view of foreign investment trends in U.S. assets. While there is evidence of a slowdown in demand and a significant reallocation of funds towards European equities, the overall demand for U.S. stocks remains robust compared to previous years. Policy uncertainties continue to influence investor behavior, but the U.S. retains its status as a dominant player in global equity markets. As global economic dynamics evolve, investors will need to navigate these shifts carefully, balancing the allure of high-performing U.S. assets with the potential risks posed by ongoing policy debates.

Notable Quotes:

• Serena Tang (00:10): "the U.S. equity market has reached an all-time high"
• Serena Tang (00:45): "Fund flows... are an important gauge of investor sentiment and market trends"
• Serena Tang (02:15): "the idea is exaggerated"
• Serena Tang (03:00): "nearly US$37 billion has gone into Europe focused equity funds year to date"
• Serena Tang (04:10): "allocation to the US has actually gone down by roughly the same amount as its share in global equity indices"
• Serena Tang (05:15): "lingering policy uncertainty dampens demand for U.S.-based assets"
• Serena Tang (05:30): "demand is unlikely to dry up completely over the next 12 months"

This comprehensive summary encapsulates the key discussions and insights presented by Serena Tang in the episode, providing a clear and detailed overview for listeners seeking to understand the current state of foreign investment in U.S. assets.