Dong Chen: Europe is the «Biggest Beneficiary» of US Outflows
With the ongoing trend of diversification away from US assets, Europe could capture a large share of the outflows due to various reasons, including a landmark fiscal policy shift, according to Pictet’s Dong Chen.
For many years, US markets have benefited strongly from investor belief in American exceptionalism. The term has been in use for over a century to describe the United States’ uniquely exemplary model compared to other nations due to factors including its adoption of free-market capitalism.
But under the new administration led by President Donald Trump, the US is opting for retrenchment rather than collaboration, leading to an accelerated structural shift towards a new world order. And this could result in changes to broader investment trends.
«We think in the coming decades, there is a real possibility that there could be some outflow […] out of the US assets into the rest of the world. And this could lead to some fading of this so-called US exceptionalism,» said Dong Chen, chief Asia strategist and head of Asia research, Pictet Wealth Management, in a recent media briefing attended by finews.asia.
Gradual De-Dollarization
In addition, there are also ongoing concerns about the US dollar due to reasons including debt sustainability. Global reserves are already reflecting this trend, with gold and the euro seeing increased allocations.
«It will be a very gradual process because at this point, there is no single currency that has the capability of replacing [the US dollar] as the most important reserve currency,» Chen added.
New Destination for Investors
Where will outflows from US assets end up? Chen believes that Europe could potentially be the «biggest beneficiary» with the continent undergoing a structural transformation driven in no small part by Germany’s landmark pivot in its fiscal policy aimed at significantly higher defense and infrastructure spending.
This policy change has also led Pictet to revise its 10-year growth forecast for the Euro area from 1.5 percent to 1.7 percent.
«Europe assets represent the biggest chunk of the foreign assets residing in the United States and if there is real repatriation of those assets out of the US, probably Europe, given what is happening on the policy front, will better capture that capital repatriation,» Chen explained.
US Fundamentals and Valuations
In the near term, Chen notes that US-listed companies, especially in the tech sector, continue to exhibit solid fundamentals with strong profit margins. However, valuations are now stretched with how much the market has rallied.
«We think that there is room for some correction,» Chen said.
