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How excessive is global investment in U.S. assets?

How excessive is global investment in U.S. assets?

Foreign ownership of U.S. assets has seen a significant rise over the past decade, but the scale and implications of this exposure are only now becoming clearer Analysts at Deutsche Bank (ETR: DBKGn) are delving into the numbers and warning that the rest of the world—particularly Europe—may be sitting on massive, and potentially risky, positions in U.S. markets.Foreigners currently hold $7 trillion in U.S. fixed income instruments and $18 trillion in equities. Since 2010, this represents an increase of $3 trillion and $15 trillion, respectively. But the key point, according to Deutsche Bank, is that "90% of this increase can be explained by the rise in the value of the underlying U.S. assets, not by new investment inflows."

In other words, foreign portfolios have become heavily concentrated in the U.S. largely because American markets have boomed—not because investors consciously reallocated their investments.To get a clearer understanding of the exposure, Deutsche Bank turns to the relative portfolio size. In Europe, U.S. assets made up about 5% of total portfolios in 2010.

By 2024, that share had risen to 20%. In Japan, it increased from 8% to 16%. Analysts noted: “The share of total U.S. portfolio holdings has quadrupled in Europe,” with most of the shift focused on equities.

This rise has generally followed the growing global weight of U.S. markets. As the U.S. share of global equities and bonds has increased, foreign holdings have followed suit—often passively.

The bank offers two explanations: “The more benign interpretation is that foreigners have simply followed the broad valuation increases passively... The more worrying interpretation is that this has left foreigners—especially Europeans—with a massive overweight in their portfolios compared to history, particularly in U.S. equities, which tend not to be hedged for currency risk.”

This unhedged exposure—especially in equities—is what Deutsche Bank highlights as a key vulnerability.

Currency hedging data is limited, but the report cites available figures from Japan, Sweden, and the Eurozone that indicate “direct unhedged foreign currency exposure to U.S. asset stock is very high.”

The risk is not just theoretical. The bank warned: “A sustained shift in foreign investor allocation away from the U.S. dollar toward historical norms has the potential to generate massive negative flows for the dollar.”