Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: This podcast was recorded for publication on the 22nd of May 2025 by HSBC Global Research. All the disclosures and disclaimers associated with it must be viewed on the link attached your media player.
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Speaker: Hello and welcome to The Macrobrief, the podcast where we look at the issues driving financial markets across the globe. I'm Aline Van Dyne, Global Managing Editor, and this week we're coming to you from New York.
Speaker: And it's been a roller coaster ride for US markets. The S&P 500 dropped sharply by almost 15% following President Trump's tariff announcements at the beginning of April, but have since steadily recovered their losses.
Speaker: So how should we be thinking about the US in this volatile environment? And could the recent volatility in global markets, from equities to the dollar to US Treasury bonds, trigger a rotation away from US assets?
Speaker: This is now one of the biggest questions in the markets. And to help us find the answer, I'm joined in the studio by Alistair Pinder, Head Emerging Markets and Global Equity Strategist.
Speaker: Hi Alistair, welcome back to the podcast. Thank you very much for having me. So let's start with some context and some numbers. Who owns the US equity market?
Speaker: So to put it into context, the US equity market is roughly $60 trillion. dollars So it's huge. And in a global context, really accounts for 65% of the global equity market market cap.
Speaker: In terms of who owns it, ah the biggest owner is US households. They account for 40% of the US equity market. But interestingly, the second biggest owner, and this has been kind of the biggest change in the U.S. equity ownership, has been foreign investors.
Speaker: ah They now account for 18% of the U.S. equity market. That was just from 7% the beginning 2000 and just 14.5% pre-COVID-19. and just fourteen and a half percent since before covid nineteen So even just over the last few years, you've seen a big acceleration in in foreign investors who have been buying US equities, trying to get on board what has been some exceptional outperformance over the last few years.
Speaker: Has anything changed, especially in the last month? Well, I think some of the biggest changes that have happened has really been ah year to date, where first of all, you've seen the underperformance of US equity markets.
Speaker: Secondly, you've seen a much more hawkish rhetoric around trade from the the Trump administration. And as a result of that, you have started to see tentative outflows from the US equity market from foreign investors.
Speaker: Our estimates basically suggest that in April alone, after Liberation Day, that we probably saw around $30 billion dollars of selling ah from foreign investors of the US equity market.
Speaker: Now again, to put that into perspective, this is a market which is $60 trillion. $30 billion dollars is not a huge amount. But within that foreign community, what we did see is that the selling, particularly amongst Canadian and Chinese investors, were actually much more aggressive.
Speaker: And when you say our estimates, is this data actually quite hard to track? So there is a data which is published by ah the Treasury, it's called Tick Data. That has a slight lag, so we only have data up until March. So to get a more real-time estimate, we basically track ah flows into non-US domiciled mutual funds and ETFs, which are focused on the US s equity market to get a proxy of how much demand there is for us equity markets from foreign investors.
Speaker: And just to put some context onto this, $30 billion dollars may not be that much in the context of $60 trillion, but how often do flows change by that much on a month-by-month basis?
Speaker: I mean, there's been pretty consistent and persistent inflows into ah the US equity market over um you know the last few years.
Speaker: And $30 billion dollars in the grand scheme of things honestly isn't that much. But the bigger question which we're facing from clients you know is is just, is this the start of something much bigger? And again, to put things into perspective, if that foreign ownership of the US equity market falls back down to pre-COVID levels, that would almost result in $2 trillion dollars outflows you know from the US equity market. And that is significant.
Speaker: And so that is the question which people are looking at is, you know, is this the start of something bigger? And if we do start to see outflows, where does that $2 trillion dollar go? Has to go somewhere. So is that going to go into cash? Is that going to go into other equity markets?
Speaker: And I think that's one of the biggest debates that we're having with investors. Interesting, Alastair. And if you if we go back to what happened in April after the Liberation Day tariff announcements, you said that ah the flows were particularly concentrated ah changes amongst Canadian and Chinese investors. Where did that money go? Is there any visibility on that?
Speaker: So when we look at fund flow data, what we do see is that Europe and and particularly Germany equities got quite a lot of those inflows. So, um you know, there's definitely been some money rotating into Eurozone equities.
Speaker: Interestingly, no money is really going into emerging market equities. In fact, really up until April, we've seen almost $60 billion dollars of outflows from foreign investors from EM. So, so far, where's that money been rotating to? Well, at least within the equity space, it's been very specific and it's been Europe.
Speaker: And I think people have definitely been more positive on the fact that European equity markets have been supported by fiscal spending from places like Germany, and also just the fact that that equity market has done much better than the US.
Speaker: And so, of course, when we say investors, that covers a wide range of types of investors. Do you have any more detailed breakdowns or analysis in terms of which investors are doing what and and which type of investors are driving the current situation?
Speaker: Yeah. So we break it down into sort of three areas. The first is global fund managers. The other is foreign retail investors. And the third category is so sovereign wealth or public pension funds.
Speaker: And for global fund managers, they have roughly two and a half trillion dollars of assets under management for global funds. So these are these are kind of asset managers that are typically a bit more quick to change their asset allocation.
Speaker: And so I think we've already seen some outflows from you know the US s from these investors already into areas like Europe, as I mentioned. ah The interesting thing, though, is that they're all already pretty massively underweight, the US equity market.
Speaker: So when you say underweight, like in terms of like relative allocations? Completely. So relative to what their benchmark is. So okay basically relative to their benchmark, we think they're the most underweight the US they've been in, you know, really history.
Speaker: So how much can they continue to be underweight the US or go more underweight in the is a bit of you know, question. So then it's kind of we're left with these kind of other two categories of investors. One is that foreign retail investor.
Speaker: And in the report that we we look at, we kind of look at what we have this analysis, which is what I would say is domestic home bias, which is something which the U.S. has been very renowned for, which is that U.S. investors, U.S. retail investors typically just invest in the U.S. s Right. Right.
Speaker: why Why bother investing elsewhere when your S&P 500 does so well? And so we look at, is this kind of phenomenon the true across the rest of the world? And in some cases it is, in areas like India, um also China, um and other parts of emerging markets, we see that their retail investor base typically just invest domestically.
Speaker: but And is that partly because of regulations and and the ease of moving capital around? 100%, And then in other areas, ah notably some of the Scandis, Europe and also the UK, what we actually find is that they have very low domestic allocation. In in the UK, if you look at how UK investors are you know invested, roughly 25 to 30 percent is in UK equities. The rest is all abroad. OK. Compared to the US, where it's like 70 to 80 percent invested. Yeah. So there is, you know, some opportunity for, say, UK investors to start allocating more domestically if they think their equity market is going to do better.
Speaker: And then the third category is sovereign wealth funds and public pension funds. And again, you know, this is a category which has a huge amount of assets, almost $36 trillion dollars in total.
Speaker: And, you know, these are what I would call slightly slower moving beasts. right They don't move their money that quickly. But when they do, it has a really big impact because they have so much money allocated. And, you know, what we could find is that there's definitely incentives for some of these sovereign wealth funds and public pension funds to perhaps reallocate some of that money that they have in the US equity market back home.
Speaker: So are you saying that the experience that we've had in the last few months of volatility, the questions that are being asked, could result in some of these slower moving funds to reassess their investment but strategies? Completely. And they might even be sometimes pressures by the government to say, you know, why are we investing in the US? Why not support our own equity market? here And again, you know, to put things into context, you know, you can have a ah market, say, like, you know, Norway or Korea or Taiwan,
Speaker: um all which have very big public pension funds and sovereign wealth funds. And you only have to reduce your US s equity exposure a little bit. But if you repatriate that back into your domestic market, that's a huge impact.
Speaker: Right, because the markets are smaller, so the the money goes further in a way. Exactly, exactly. So that could be a very big catalyst for some of these domestic markets, if even if you see small changes in in US equity allocation.
Speaker: So Alastair, going back to our big question, are we on the precipice of a structural shift in equity flows globally? It sounds like you're watching to see what some of these big investor groups are going to do. Is it is it still the jury's out? i think the The jury is definitely out. The one thing that I would, you know, say I would push back on in terms of the view, which is that if you do see the foreign investor pull out money from the US, I think, you know, even if it's a small shift, I don't think it would have that big of an impact on the US equity market, given how much of a big beast that is.
Speaker: But it could have a huge impact on some of these smaller markets. So you could have a world where, you know, actually small changes in ah allocations by foreign investors have very minimal impact on the US equity ah market, but have really big impacts on the foreign equity market. And so actually it's kind of a almost a win-win situation from a global context.
Speaker: That's interesting. Is there anything else that surprised you in terms of the investor flows or or the action that we've seen in the markets in the last couple of months? I mean, it certainly has been a ah very interesting time.
Speaker: Yeah, I mean, in in the global context, I think, you know, one of the interesting things that we have seen is that when you look at regional equity markets, so ah Europe has done very well. And of course, the US has underperformed.
Speaker: One of the surprise performers has actually been emerging markets. where, you know, despite them, arguably, you know, and and often being seen as one of the more sensitive to tariffs, they have continued to outperform.
Speaker: Yet despite this, they have seen significant amount of outflows from from foreign investors. I think that has been a surprise. And I think that is, you know, their resilience has been a surprise for, you know, um fund managers as well. And it does make me think whether um actually you'll see more flows go into EM equity markets if they continue to prove their resilience in the coming months.
Speaker: Interesting. A lot to watch. Thank you, Alistair. Thank you very much for having me.
Speaker: That's it for this week. Don't forget to follow the Macro Brief wherever you get your podcasts. And you can get in touch with us at askresearch at hsvc.com with any comments or questions.
Speaker: So until next week, thanks for listening.
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