Tilting away from the US

The Trump administration’s attacks on its trading partners through tariffs and aggressive diplomacy has rightly made investors nervous about investing in the US. Negative sentiment is likely to linger even if some of Trump’s more extreme decisions are reversed.

Whatever form US policies finally take, they are likely to contribute to the wider fragmentation of the existing unipolar economic and financial system. The result is a rise in the big and increasingly powerful BRICS+ emerging economies as we describe in our research report: BRICS+ and contested global leadership: implications for investment managers. 

For multi asset investors with emerging market holdings, the shift holds at least two significant implications. First, MAGA and the growing prominence of BRICS+ nations should boost demand for non-US assets. And second, reallocation will include private assets – this is unlikely to be a smooth process, but it should deepen the capital markets infrastructure in emerging economies.

Trade reorientation

The US’s pursuit of policies that seek to reduce the trade deficit will have the consequence of reducing its capital account surplus (which is the mirror of a current account deficit). The impact of this should be lower volumes of US dollar balances outside of the US being reinvested into US assets.

The US anti-trade policies will spur even further regionalisation of trade. This will create more significant intra-BRICS+ trade deficits and surpluses and therefore capital account deficits and surpluses. As a result, a bigger proportion of these current account surpluses will be reinvested within BRICS+ asset markets. This incremental internal demand for assets within this universe will prove a positive catalyst for its asset markets.

Public vs private

Regionalisation of global trade is also creating a regionalisation of global capital. Right now, the US makes up around 70% of the global market for public and private equities. But as the US’s capital account surplus shrinks, there will be a rebalancing away from US dollar assets.

That should be fairly straight-forward in public markets, but it is much harder and a longer process to reallocate geographic exposure within private markets given that these assets tend to require investors to lock up their capital for long periods. We expect limited partners in Asia and the Middle East increasingly to diversify new allocations to investments outside of the US, not least on growing fears that US authorities could target sanctions on foreign capital. A rising portion of these funds – particularly those of state and quasi-state limited partners – are likely to flow into BRICS+ assets. Chinese investors are already reported to be pulling back from US private equity investments.

The long term and illiquid nature of these investments and Trump’s antagonism to foreigners gives validity to these fears. We would not be surprised to see BRICS+ markets strengthen investor protection and laws across the bloc to incentivise this long term capital allocation. Such protections would deepen the capital markets infrastructure in BRICS+ and have a positive flywheel effect on these economies.