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Welcome to Thoughts on the Market. I'm Chetan Aiya Mohman, Sandy's chief Asia economist. Today, an issue that's gaining traction in boardrooms and trading floors the three big decisions Asia investors are facing right now it's Tuesday, July 22nd at 2pm in Hong Kong. So let's start with the big picture. Over the past 13 years, Asia's international investment position has doubled to $46 trillion. A sizable proportion of that is invested in US assets. But the recent weakness in the US dollar gives rise to three important questions for investors across Asia. Should they diversify away from U.S. assets? How much of Asia's incremental saving should be allocated to the US or should they hedge the US Exposure more aggressively? First, on the diversification debate, investors are voicing concern over the US Macro outlook given the twin deficits. At the same time, our US Economics team continues to see growth slowing as better than expected fiscal impulse in the near term will not fully offset the drag from tariffs and tighter immigration policies. This convergence in US Growth and interest rates with global peers and continued debate about the US Dollar safe haven status has already led to US Dollar depreciation, and our macro strategists expect further depreciation of the USD by another 8 to 9% by second quarter of next year. So what is the data indicating? Are investors already diversifying? Let's look at Asia's security portfolio, as that data is more transparently available. Out of the total international investment of $46 trillion, Asia's securities portfolio alone is worth $21 trillion. And of that, $8.6 trillion is in US assets as of Q1 2025. Now here's an interesting point. China's holding had already peaked in 2013, but Asia X China's holdings of US assets has been increasing. Asia X China's US holdings hit a record $7.2 trillion in the first quarter, largely driven by equities. In other words, in aggregate, Asia investors are not diversifying at the moment, but they are allocating less from their incremental saving. Asia's current account surplus remains high at $1.1 trillion in the first quarter, and even if it narrows a bit from here, the structural surplus means Asia's total international investment position will keep growing. However, incremental allocations to the US are beginning to decline. The share of US assets in Asia's securities portfolio peaked at 41.5% in the fourth quarter of 2024 and started to dip in the first quarter of this year. In fact, our global cross asset strategist Serena Tang notes that Asian investors have reduced net buying of US equities in the second quarter finally, let's talk about hedging. Asian investors have started to increase hedging of their US Investment position, and we see increased hedging demand as one reason why Asian currencies have strengthened recently. Take Taiwan life Insurance, often seen as proxy for broader trends. While their hedge ratios were still falling in the first quarter, they started increasing again in the second. That lines up with the sharp appreciation of Taiwanese dollar in the second quarter. Meanwhile, the currencies of other economies with large US Asset holdings have also appreciated since the dollar's peak. These are clear signals to us that increasing hedging demand is influencing foreign exchange markets. All in all, Asia's $46 trillion investment position gives it an enormous influence whether investors decide to diversify, allocate less or stay the course, and how much to hedge will affect currency trends going forward. Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today.
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