Despite increasing global geopolitical and macroeconomic concerns, international investors seem to have reached a consensus on one point: to increase holdings of U.S. assets.
However, Ruchir Sharma, chairman of Rockefeller International, pointed out that this mindset is inflating an unprecedented bubble and distorting the fundamentals of other economies. Sharma said, "Due to confidence in the strength of the U.S. financial markets and its ability to continue outperforming all other economies, global investors are allocating more capital to a single country than at any time in modern history."
Sharma stated that U.S. stocks account for nearly 70% of major global stock indices, far higher than the approximately 30% level in the 1980s. In addition to the positive earnings expectations of top U.S. companies, expectations that elected President Trump will boost the domestic economy have also led the world to continue investing in the U.S.
Sharma added that, meanwhile, according to some measures, the dollar has reached its highest level in the past 50 years.
Since October, the dollar's rise has accelerated due to predictions about Trump's policies stimulating overseas demand for U.S. Treasury assets priced in dollars. Sharma said that so far this year, overseas traders have been investing in U.S. bonds at an annual rate of $1 trillion, nearly double the inflow of funds to the eurozone.
He wrote, "Discussions about tech or AI bubbles, or investment strategies focused on growth and momentum, obscure the mother of all bubbles in the U.S. market, which thoroughly dominates the thinking space of global investors; U.S. assets are overheld, overvalued, and overhyped to an unprecedented degree."
It is certain that the U.S. market's excellent performance is, to some extent, deserved, Sharma pointed out, as U.S. economic growth has outpaced that of other developed economies. But even during the internet bubble of the 2000s, when U.S. stock valuations were higher than now, investors did not see such a huge premium relative to the rest of the world.
Sharma stated that while these conditions make it inevitable for the U.S. market to eventually decline, they also create troubles for foreign economies.
He wrote, "In the past, including the roaring twenties and the internet age, the rise of the U.S. market would drive other markets up. Today, the prosperity of the U.S. market is siphoning off funds from other markets."
Sharma added, "When funds leave smaller markets, the outflow weakens local currencies, forcing the country's central bank to raise interest rates, slow down economic growth, and make the country's fundamentals look worse."
Article reposted from: Jinshi Data