Here’s why foreign investors are moving elsewhere.

March 24, 2023

minute read

America the Uninvestible, welcome.

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That strikes me as an odd thing to say about the country that is the preferred choice of investors worldwide, offering the largest corporations, the most liquid markets, and the rule of law to safeguard shareholder returns. Governmental meddling is also meant to be kept to a minimum. It has undoubtedly also helped that American stocks have outperformed those of other countries over the past ten years.

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In fact, we hadn't even discussed China's lack of investment potential until last year. The economic growth had been stifled by its zero-Covid policy. Investors lost faith in what were the best-performing equities in that market due to the government's crackdown on tech firms like Tencent Holdings 700 +0.32% (0700.Hong Kong) and Alibaba Group Holding BABA -0.10% (ticker: BABA). Also, investing in the second-largest economy in the world was particularly risky due to the escalating tensions between the U.S. and China, which included the potential delisting of Chinese companies from American markets. That's probably still the case for the majority of Americans, and Chinese stocks today appear more attractive as a trade than as a long-term investment.

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Yet for some foreign investors, especially those who have money to burn and have little interest in democracy, it may be the United States that is beginning to seem uninvestable. Holding dollars became riskier for any nation that might find themselves on the opposing side as a result of the U.S. move to freeze Russia's dollar assets and restrict Russian banks' access to the Swift system. The current debt-ceiling impasse further increases the likelihood that the United States could default and could result in the loss of another AAA credit rating, which would be an own goal that serious countries shouldn't commit.

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Government interference is no longer limited to China. Because Walt Disney DIS -2.72% (DIS) was too "woke," Florida Governor Ron DeSantis targeted Disney World's sweet deals, and California stopped a $54 million with Walgreens Boots Alliance (WBA) after the latter said it wouldn't provide abortion drugs in 21 states that had threatened legal action against it. Both the left and the right are criticizing tech behemoths like Apple AAPL -0.48% (AAPL), Alphabet GOOGL -1.62% (GOOGL), and Meta Platforms (META) over antitrust concerns and free speech. While being less centralized and more ad hoc than China's rigid regulations, it must undoubtedly annoy investors.

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Why should money continue to flow from the "larger South" into the "unified West" if Major economies no longer uphold property rights as inviolable? Louis-Vincent Gave, CEO of the research firm Gavekal, writes this.

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Perhaps it won't. International investors sold $36.6 billion of U.S. securities in January. Treasury outflows have continued for the fourth month in a row, according to Citigroup statistics. Also, while the total amount has increased by 6.8% since the end of 2019, the proportion of foreign-owned U.S. government debt has decreased from 39.2% to 29.3%.

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According to the World Gold Council, central banks purchased nearly $70 billion, or 1,136 metric tons, of gold in 2022. Investors inside or outside the United States may want to consider gold as a result. The SPDR Gold Shares marketplace fund (GLD) has gained 9.5% so far in 2023, which is a wonderful start for gold. This is a result of falling bond yields, the potential that the Federal Reserve would soon stop raising interest rates, and the risk-off mood following the failure of Silicon Valley Bank. As long as investors don't get too comfortable, gold prices may continue to rise.

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It might also be time for American investors to start looking for equities abroad. The SPDR S&P 500 ETF (SPY) outperformed the Vanguard FTSE All-World ex-US ETF (VEU), which earned just 4.1%, over the past ten years, sometimes known as the There Is No Alternative era, returning 12% overall after reinvested dividends. It might be beginning to alter. Senior analyst at Richard Bernstein Advisers Matthew Poterba observes that both international and American stocks frequently move in protracted cycles of outperformance and underperformance—and that the cycle may be moving away from the United States. This is mostly because the rest of the world has less exposure to the technology sector and industries that are closely tied to it, which often do better when rates of interest are low, money is readily available by, and growth firms outperform.

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The macro fundamentals of today are the exact reverse, according to Poterba. "International markets' sector exposure should improve performance if our prediction that interest rates and inflation would remain higher for longer is right."

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Home is not the best place to be.