Are Foreign Investors Fleeing U.S. Assets?

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Jul 9, 2025

Investigate the shifting tides in global investment as the demand for U.S. assets appears to wane amid trade uncertainties. European equities are gaining traction, suggesting a nuanced view of U.S. markets. Fund flows may indicate a decline in interest, but are investors overreacting? The episode dives into whether foreign investors are truly abandoning U.S. stocks and offers insights on underlying sentiments that could reshape market dynamics.

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INSIGHT

U.S. Markets High Amid Concerns

The U.S. equity market reached an all-time high despite uncertainty about trade and tariff policies.
Although demand for U.S. stocks has declined, the idea that investors are fleeing is exaggerated.

INSIGHT

Equity Flows Shift to Europe

International investors slowed buying U.S. equities in 2024 but remained net buyers in April and May.
Increased flows are shifting to Europe-focused equity funds, surpassing flows to Japan and emerging markets.

INSIGHT

Changing Allocations and Exclusions

Global equity fund allocations show U.S. stock weight declining in line with its index share.
Some investors are increasing exposure to international equities while completely excluding U.S. stocks.

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Our Chief Cross-Asset Strategist Serena Tang discusses whether demand for U.S. stocks has fallen and where fund flows are surging.

Read more insights from Morgan Stanley.

----- Transcript -----

Serena Tang: Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist.

Today – is the demand for U.S. assets declining? Let's look at the recent trends in global investment flows.

It’s Wednesday, July 9th at 1pm in New York.

The U.S. equity market has reached an all-time high, but at the same time lingering uncertainty about U.S. trade and tariff policies is forcing global investors to consider the riskiness of U.S. assets. And so the big question we need to ask is: are investors – particularly foreign investors – fleeing U.S. assets?

This question comes from recent data around fund flows to global equities. And we have to acknowledge that demand for U.S. stocks overall has declined, going by high-frequency data. But at the same time, we think this idea is exaggerated.

So why is that? As many listeners know, fund flows – which represent the net movement of money into and out of various investment vehicles like mutual funds and ETFs – are an important gauge of investor sentiment and market trends. So what are fund flows really telling us about investors’ sentiment towards U.S. equities? It would be nice to get an unequivocal answer, but of course, the devil is always in the details. And the problem is that different data sources and frequencies across different market segments don’t always lead to the same conclusions.

Weekly data across global equity ETF and mutual funds from Lipper show that international investors were net buyers through most of April and May. But the pace of buying has slowed year-to-date versus 2024. Still, it remains much higher than during the same period in 2021 through 2023. Treasury TIC data point to something similar – a slowdown in foreign demand, but not significant net selling.

So where are the flows going, if not to the U.S.? They are going to the rest of the world, but more particularly, Europe. Europe stocks, in fact, have been the biggest beneficiary of decreasing flows to the U.S. Nearly $37 billion U.S. has gone into Europe-focused equity funds year-to-date. This is significantly higher than the run-rates over the prior five years. What’s more notable here is that year-to-date, flows to European-focused ETFs and mutual funds dominated those targeting Japan and Emerging Markets. This suggests that Europe is now the premier destination for equity fund flows, with very little demand spillovers to other regions' equity markets.

These shifts have yet to show up in the allocation data, which tracks how global asset managers invest in stocks regionally. Global equity funds' portfolio weights to Rest-of-the-World has gone up by roughly the same amount as allocation to the U.S. has come down. But allocation to the U.S. has actually gone down by roughly the same amount, as its share in global equity indices; which means that If allocation to the U.S. has changed, it's simply because the U.S. is now a smaller part of equity indices.

Meanwhile, an estimated U.S.$9 billion from Rest-of-the World went into international equity funds, which excludes U.S. stocks altogether. Granted, it’s not a lot; but scaled for fund assets, it's the highest net flows international equities have seen. In other words, some investors are choosing to invest in equities excluding U.S. altogether.

These trends are unlikely to reverse as long as lingering policy uncertainty dampens demand for U.S.-based assets. But as we've argued in our mid-year outlook, there are very few alternative markets to the U.S. dollar markets right now. U.S. stocks might start to see less marginal flows from foreign investors – to the benefit of Rest-of-the-World equities, especially Europe. But demand is unlikely to dry up completely over the next 12 months.

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