Foreign Investment in U.S. Stocks Reaches New Heights
(Bloomberg) – There was a genuine concern that foreign investors might steer clear of American financial products as Donald Trump intensified his trade war, contemplated Canada’s annexation, and generally unsettled global perceptions of the U.S. last spring.
Intriguingly, there has been a noticeable uptick in foreign interest in U.S. stocks. Data from the Federal Reserve indicates that foreign investments surged to record levels in the second quarter. Interestingly, stocks now account for nearly 32% of foreign allocations to U.S. assets, marking a new high since 1968.
This data suggests that while international visitors have hesitated to travel to the U.S. and buy American goods, the allure of the stock market remains compelling. Part of this attraction seems linked to companies profiting from advancements in artificial intelligence. While foreign investors are aggressively purchasing stocks, their currencies are showing a sharp decline, possibly as a hedge against U.S. exposure.
Rob Anderson, a strategist at Ned Davis Research, observed, “Although tariffs have pushed more foreign consumers to boycott U.S. products, demand for U.S. stocks remains robust.” For instance, Canadians are purchasing American stocks even while avoiding other products from the U.S.
Foreign investments amounted to $290.7 billion in the U.S. stock market for the quarter ending June 30, based on Fed data. Ellis Garrow, from Bank of America, noted that foreign holdings of U.S. stocks are projected to reach a pace of $2.8 trillion this year.
Foreign investors currently hold approximately $18 trillion in U.S. stocks, representing about 30% of a market worth around $60 trillion—the highest levels recorded since 1945. While the dollar value of these holdings is certainly influenced by asset prices, the overall percentage has climbed.
“International investors are still purchasing U.S. stocks at a very strong pace,” Garrow commented.
At the index level, returns have been solid, but the pace of purchases has been somewhat subdued compared to other major markets. The S&P 500, for instance, falls short of equity benchmarks in Canada, Mexico, Brazil, Japan, and China, both in local currency and U.S. dollars.
The MSCI World Index has seen a 15% rise this year, outpacing the S&P 500 for the first time since 2017. The MSCI National Global Index has posted an impressive 22% increase, compared to just 13% for the S&P 500.
Surprisingly, foreign purchases caught CFRA chief investment strategist Sam Stoval off guard, although not necessarily for political reasons. “Why are they investing here when their own markets are hitting record highs?” he wondered, also noting that a weakening dollar could dampen returns.
Stoval expressed that his insights lean towards major tech firms, pointing out that foreign investors are selectively targeting them based on AI trends, with significant influence in the U.S. market. He mentioned that the tech sector has hit 26 new highs this year.
The trend certainly appears positive. U.S. stocks have been soaring since April 8, with the recent trends reflecting shifts post the Fed’s first interest rate cut.
Garrow indicated that this enthusiasm is likely to continue into the third quarter and beyond, mentioning EPFR data that shows international investors are adding U.S. stock funds at the fastest rate since March.
Brian Jacobsen, chief economist at Annexwells Management, believes that investment in the U.S. stock market offers a somewhat stable perspective on financial markets, regardless of opinions about the U.S. government. “Many foreign holders of U.S. assets, who may not favor holding Treasuries, recognize that their grievances are aimed at the government rather than businesses,” Jacobsen explained.
