Asian investors have trimmed their incremental allocations to US equities as the dollar weakened, but reducing their overall exposure to US assets remains difficult, according to a recent Morgan Stanley report.
The proportion of US assets in Asia’s securities portfolios fell by 0.7 percentage points, to 40.8 per cent in the first quarter from a peak of 41.5 per cent in the fourth quarter of 2024, the highest level since late 2017, the report said.
The pullback was pronounced in China, where the share of US assets in portfolio investments declined by about 16 percentage points to 28 per cent in March this year from December 2017.
However, the report said reducing Asia’s overall stockpile of US assets was not easy given the current account surpluses of the region’s economies, which were at a record high of US$1.1 trillion in the first quarter.
Economies with surplus capital often invest in US financial markets, which are the world’s largest and most liquid, according to the Cato Institute, a US-based think tank.
“Asia’s gross international investment position [in US stocks] will continue to grow,” Morgan Stanley analysts wrote. “The lack of large and liquid alternatives means that it would be difficult for Asia to reduce its holdings of US assets.”
While China’s holdings of US assets dropped to US$1.3 trillion this year from their 2013 peak of US$1.8 trillion, the rest of Asia continued to increase its exposure to US assets to a new high of US$7.2 trillion in the first quarter.
The weakening of the US dollar was one reason Asian investors were reconsidering their allocations to US assets. Analysts remain bearish on the greenback, expecting further weakening amid high US fiscal deficits, a widening current account gap, and the drag from tariffs on the US economic outlook.
The US dollar index, a benchmark gauging the value of the dollar against a basket of six foreign currencies, dropped to 98 on Tuesday, down nearly 6 per cent over the past 12 months, according to Trading Economics, an online financial data provider.
In April, the Trump administration imposed a minimum 10 per cent tariff on imports from many countries. China was among those most affected, with Beijing’s retaliatory tariffs reaching as high as 125 per cent before both sides agreed to ease tensions.
In May, Beijing and Washington reached an agreement to implement a 90-day pause on tariffs on each other’s goods, which was expected to end in August. Both countries’ leaders were expected to re-enter tariff negotiations next month. - South China Morning Post
