AS GLOBAL investors rethink their exposure to US financial assets, a mix of economic pitfalls and shifting US policy will prompt a gradual shift in how and where capital is allocated.
At the heart of this shift lies Asia – poised to drive and benefit from the transition – and if managed well, it could emerge as a key destination for global capital in the years ahead.
The US economy faces long-term economic issues amid tighter policies on trade and immigration that risk weakening potential growth and dragging corporate performance. Meanwhile, rising external debt levels and large budget deficits raise questions about the long-term financial stability of the world’s largest economy. These issues are denting the appeal of US financial assets.
Foreign investors currently hold about US$31.3 trillion in long-term US portfolio assets, equivalent to about 27 per cent of global gross domestic product. This includes US$17.3 trillion in equities and US$7.6 trillion in government bonds (Treasuries). As investors reassess the risks and returns of these holdings, they are likely to reallocate capital, albeit gradually.
Asia is central to this development. Five major economies with surplus net international investment positions (NIIP) – mainland China, Taiwan, Hong Kong, Singapore, and South Korea – together hold US$4.3 trillion in long-term US portfolio assets.
In four of these markets (except mainland China), investors hold more US assets than foreign-currency assets in their international reserves. This reflects the size and influence of their institutional investors, such as insurance companies, sovereign wealth funds, and asset managers.
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These investors are expected to lead the shift away from US assets, perhaps starting with US equities, which have traded at high valuations for quite some time. However, investors would likely reallocate US Treasuries more slowly, as few alternatives offer similar liquidity and scale.
Where will this capital go? In times of market uncertainty, investors may first turn to other developed markets including Europe, Japan, Australia, and New Zealand. But as markets become more balanced or optimistic, investors will be drawn to Asia thanks to its promise of higher yields and returns.
Over the past decade, many Asian economies have strengthened their macro and financial health. Governments have kept budget deficits more contained, maintained stable current account balances and managed inflation more effectively. Combined with relatively higher potential growth, these improvements make Asia more attractive to global investors.
At the same time, foreign investors have reduced their exposure to Asian assets, especially equities in emerging Asian markets. This underinvestment creates room for diversification and fresh inflows.
Asia has the capacity to absorb substantial foreign capital. For example, foreign ownership of Indian bonds and equities remains below 5 per cent and 20 per cent, respectively, even though India is the fifth-largest economy in the world. In contrast, smaller economies like Taiwan, Hong Kong, and Singapore may initiate the shift, but lack the scale to absorb it fully. This opens the door for intra-regional capital flows, especially toward larger, NIIP-deficit economies.
The potential size of these flows can be significant. If the five NIIP-surplus Asian economies reallocate just 20 per cent of their current US equity holdings, they could free up around US$40 billion. That’s more than one-fifth of the cumulative equity inflows into India, Indonesia, Malaysia, and the Philippines since 2000.
Central banks may take longer to respond to the theme of diversification. Historically, they have adjusted their international reserves cautiously. It took 25 years for the share of US Treasuries in global allocated reserves to fall from 72 per cent to 57 per cent.
While many central banks plan to reduce this share further, most still expect the US dollar to remain dominant. For now, they are focusing on hedging risks, mostly by increasing their gold holdings.
The trend of diversification is still in the early stages. A recent Bank for International Settlements (BIS) bulletin noted hedging activity (not large-scale selling of US assets) from Asian investors drove the sharp US dollar weakness in April and May 2025.
Still, reports of rising inflows into Asian local debt markets suggest the shift may already be underway.
As this trend develops, Asia could see stronger support for its balance of payments. But central banks and policymakers will need to manage the side effects, such as currency volatility, asset price swings, liquidity challenges, and real exchange rate appreciation – especially when foreign trade potential may weaken due to tariffs and slower global integration.
The move away from US portfolio assets won’t happen overnight, but we are building up towards that future. A major shift is in the offing.
Sanjay Mathur is chief economist for South-east Asia and India at ANZ. Dhiraj Nim is economist and FX strategist at ANZ.
