By Despite mounting geopolitical and macroeconomic concerns globally, international investors seem to agree on one thing: load up on US assets.
Yet, Ruchir Sharma wrote for the Financial Times that this mentality is inflating an unprecedented bubble and skewing fundamentals in other economies.
“United by faith in the strength of US financial markets and their capacity to keep outperforming all other economies, global investors are committing more capital to a single country than ever before in modern history,” the Rockefeller International chair said.
According to Sharma, US shares account for almost 70% of the leading global stock index, far above its level of about 30% of the index in the 1980s. Apart from positive earnings outlooks among top US companies, expectations that President-elect Donald Trump will boost the domestic economy has kept the world invested.
By some measures, meanwhile, the US dollar has now hit its highest level in the same five-decade timeframe, Sharma added.
Greenback gains accelerated since October, as forecasts for Trump’s policies fueled foreign demand for dollar-denominated US Treasury assets. So far this year, overseas traders have committed an annualized rate of $1 trillion into US debt securities, close to double eurozone flows, Sharma said.
“Talk of bubbles in tech or AI, or in investment strategies focused on growth and momentum, obscures the mother of all bubbles in US markets,” he wrote. “Thoroughly dominating the mind space of global investors, America is over-owned, overvalued and overhyped to a degree never seen before.”
To be sure, US market outperformance is deserved to some degree, with Sharma noting that American economic growth has outpaced its peers among developed economies. But even during the 2000s dot-com bubble, when US stock valuations were higher than they are now, investors didn’t see as vast of a premium relative to the rest of the world.
While these conditions put US markets on course for an eventual decline, they also spell trouble for foreign economies, Sharma said.
“In the past, including the roaring 1920s and the dotcom era, a rising US market would lift other markets. Today, a booming US market is sucking money out of the others,” he wrote.
Sharma added: “When money leaves smaller markets, the outflows weaken the currency, force the central bank to raise rates, slow the economy and make the nation’s fundamentals look worse.”
