Asia’s $46 Trillion Question

0:00Chetan Ahya:Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Sandy's Chief Asia Economist. Today, an issue that's gaining traction in boardrooms and trading floors. The three big decisions Asia investors are facing right now. It's Tuesday, July 22nd at 2 p.m. in Hong Kong.

0:21Chetan Ahya:So let's start with the big picture. Over the past 13 years, Asia's international investment position has doubled to$46 trillion. A sizable proportion of that is invested in U.S. assets. But the recent weakness in the U.S. dollar gives rise to three important questions for investors across Asia. Should they diversify away from U.S. assets? How much of Asia's incremental saving should be allocated to the U.S.? Or should they hedge the U.S. exposure more aggressively? First, on the diversification debate. Investors are voicing concern over the U.S. macro outlook given the twin deficits. At the same time, our U.S.

1:05Chetan Ahya:economics team continues to see growth slowing as better-than-expected fiscal impulse in the near term will not fully offset the drag from tariffs and tighter immigration policies. This convergence in U.S. growth and interest rates with global peers and continued debate about the U.S. dollar safe haven status has already led to U.S. dollar depreciation. And our macro strategies expect further depreciation of the USD by another 8 to 9 percent by second quarter of next year. So what is the data indicating? Are investors already diversifying? Let's look at Asia's security portfolio as that data is more transparently available.

1:47Chetan Ahya:Out of the total international investment of$46 trillion, Asia's securities portfolio alone is worth$21 trillion. And of that,$8.6 trillion is in U.S. assets as of first quarter of 2025. Now, here's an interesting point. China's holding had already peaked in 2013, but Asia x China's holdings of U.S. assets has been increasing. Asia x China's U.S. holdings hit a record$7.2 trillion in the first quarter, largely driven by equities. In other words, in aggregate, Asia investors are not diversifying at the moment, but they are allocating less from their incremental saving. Asia's current account surplus remains high at$1.1 trillion in the first quarter.

2:38Chetan Ahya:And even if it narrows a bit from here, the structural surplus means Asia's total international investment position will keep growing. However, incremental allocations to the U.S. are beginning to decline. The share of U.S. assets in Asia's securities portfolio peaked at 41.5 % in the fourth quarter of 2024 and started to dip in the first quarter of this year. In fact, our global cross-asset strategist Serena Tang notes that Asian investors have reduced net buying of U.S. equities in the second quarter. Finally, let's talk about hedging. Asian investors have started to increase hedging of the U.S.

3:19investment position, and we see increased hedging

3:21Chetan Ahya:demand as one reason why Asian currencies have strengthened recently. Take Taiwan life insurance, often seen as proxy for broader trends. While their hedge ratios were still falling in the first quarter, they started increasing again in the second. That lines up with the sharp appreciation of Taiwanese dollar in the second quarter. Meanwhile, the currencies of other economies with large U.S. asset holdings have also appreciated since the dollar's peak. These are clear signals to us that increasing hedging demand is influencing foreign exchange markets. All in all, Asia's$46 trillion investment position gives it an enormous influence.

4:05Chetan Ahya:Whether investors decide to diversify, allocate less, or stay the course, and how much to hedge will affect currency trends going forward. Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.