Investors say dumping of US assets in favor of a revived European market marks the onset of much longer-term moves by pension funds and other large institutional managers.
Wall Street banks say they see signs that investors who manage trillions of dollars of assets are beginning to cut US positions on concerns about volatile policy making, attacks on President Donald Trump’s Federal Reserve Chairman and radioactive fallout from the trade war.
US stocks have largely recovered their losses since Trump’s so-called “liberation day” tariff announcement last month shook global markets, but this year remains in negative territory behind global peers. The dollar has fallen more than 7% this year, with some investors referring to “capital flights” from the US to other assets, such as German government debt.
“We’ve been working hard to get the most out of our business,” said Luca Paolini, Chief Strategist at Pictet Asset Management. He added that the mix of relatively inexpensive stock markets and catalysts for European economic growth, such as German-led defence spending, has made Europe “the most logical” destination.
A Bank of America study showed investors cut US stock allocations “the biggest ever” in March, showing that the transition from the world’s largest economy to Europe is the sharpest since 1999.
According to data from MorningStar Direct, the capital that Europe invests in US debt and equity (one area used by analysts to see this shift) has reached its highest level since early 2023. The same equity ETF saw more leaks in early May, but fixed income equivalents pulled back some money.
Morningstar principal Kenneth Lamont said selling dollar assets “reverses the long-term trend in which US assets are consistently strong net inflow beneficiaries.” This reversal is partly due to European investors’ “patriotic” changes to domestic sectors such as defense.
In a sign of a major change in global capital, the euro has surged simultaneously with German government bonds in recent weeks, disrupting normal patterns, suggesting investors are seeking non-dollar shelters assets. Investment banks report sustained sales of US dollars and euro purchases in spot trading by institutional investors.
Thanos Vampaquidis, head of Bank of America’s Global G10 FX Strategy, said banks have begun to see “real money (institutional) dollars sold only in recent weeks.” George Saravelos, global head of FX Research at Deutsche Bank, said he saw “large sales of US dollars from Real Money Investors over the past three months.”
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Finland’s Veritas Pension Insurance Company reduced its US equity exposure in the first quarter. Chief Investment Officer Laura Wickström told the Financial Times that the US stocks are highly valuated, but he said, “Uncertainty and tariff communication. The confusion and unpredictability associated with it have led to doubt the idea that such premiums should be paid.”
John Pierce, chief investment officer for Australia’s Australian pension plan, Australia’s $149 billion, said in a podcast last month that his fund had a huge exposure to US assets and “questioning its commitment.”
“Frankly, I think we saw a peak investment in US assets,” he added.
The Danish Pension Fund launched in the first quarter to its first sale of US stocks since 2022, and its largest purchase of European listed stocks since 2018.
Samlington Brown, global head of BNP Paribus’ macro strategy, said if the European pension fund cuts its allocation to the 2015 level, it would amount to sales of up to 300 million euros in dollar assets.
For many years, the US has been a beneficiary of a huge capital inflow that has been fascinated by its economic growth and its market liquidity and strong performance.
“If capital globalization is reversed, the question is how quickly it will be,” said John Butler, rate strategist at Wellington Management. “This (trend) should result in net capital outflows from the US and other markets that have structural implications for the US dollar, stocks and bond markets.”
According to analysts, there are limits to how far this trend can go, given the depth and liquidity of the US stock market and the Treasury market of almost $300-3 million.
But even US pension funds are considering their position. Scott Chan, chief investment officer for California’s $350 billion teacher retirement plan, said at a meeting this week that one of the “unintended risks and consequences of opening Pandora’s boxes on tariffs” could be the sale of US assets by its biggest trading partner.
“The problem for us is that we are so focused on US assets that we need to be more diverse,” Chan said.
This year’s dollar slides have been particularly painful for foreign investors who owned US assets but did not hedge currency risks.
Bank of America estimates that if these hedges are returned to pre-Covid hedge levels, this could mean that European investors hedge $250 million in currency risk in dollar assets. Such activities are expected to put downward pressure on the dollar.
However, many investors are not in a hurry to make a decision, keeping in mind the risk of betting on the long-term growth of the US market.
“We have an internal debate about whether to reduce the US exceptionalism (and) quota,” one investor said. “Experience shows that we need to be aware of these changes and that bets on the US are not going well.”
Additional Reports by Alan Livezay
