IF world trade and politics are being balkanised, investment flows may not be far behind. The implications of a mass repatriation of global capital are squarely on the radar for many investors.
For investors, contemplating a reversal of globalisation is less unthinkable and increasingly a market norm.
Trade wars, hot wars, polarised blocs, national security priorities, industrial policies and investment curbs are all daily considerations for investors in the biggest economies, never mind the traditionally more volatile emerging ones.
Donald Trump‘s return to the White House with an explicit “America First” agenda has catalysed this retreat from globalisation, but it’s one that’s been underway since his first term almost nine years ago and, arguably, since the banking crash in 2008.
The pandemic upped the stakes.
One major question during the tariff disputes this spring was whether America’s exceptional outperformance as the home of choice for cross-border investment had been tarnished.
The concern was foreign investors loaded up with expensive United States assets may cut and run and diversify elsewhere.
Those worries appear to have been premature to date, even if widescale hedging of dollar currency exposure did ensue.
But the issue extends beyond US exceptionalism.
The real question is whether an extreme “home bias” re-emerges on the back of rising trade barriers, increased capital curbs and stretched valuations.
At the same time, governments are creating a wave of incentives to keep investment savings at home, often to fund national priorities like defence, tech or budgetary reasons.
In other words, if “America First” sets the agenda of the world’s biggest economy, should we also now brace for China First, Europe First and even Japan First or Britain First?
As Trump uses tariffs to cut the huge US trade deficit, his re-industrialisation agenda and push to retain US tech dominance involve not only extraordinary industrial policies to tempt or pressure investment back home but even government stakes in key firms and industries.
JPMorgan’s recent US$1.5 trillion “America First” lending plan over 10 years highlights the scale of the wider push.
And it speaks to the Trump team’s belief that US domestic capital and investment can make up for any exit of foreign money, which would have to occur if both gigantic current and capital account imbalances are to shrink.
Seeing the writing on the wall, China has doubled down on developing its own tech ecosystem and domestic demand.
Led by Germany, Europe’s defence, infrastructure and capital markets push is underway. Japan, the UK and Canada are floating similar priorities.
Trying to capture what a prolonged wave of global capital repatriation might mean for financial markets — and currency markets in particular — Deutsche Bank last week tried to model the impact of a massive repatriation of overseas money.
“The theme of ‘homecoming’ will be a structural one for markets in the quarters and years to come,” concluded Mallika Sachdeva at the Deutsche Bank Research Institute.
Sachdeva examined countries with large net investment savings overseas but also considered the scale of their surplus relative to the size of their domestic markets to determine whether they could absorb the backflow.
Of course, many big-saving countries have to push money overseas due to the limited capacity and scope of their own markets, and some use giant sovereign wealth funds mandated to diversify abroad, so that was considered when calculating the related repatriation risk.
The Deutsche Bank model looks solely at portfolio exposure in stocks and bonds, excluding direct brick-and-mortar investments.
It also measures these foreign asset positions relative to the size of a country’s equity or government bond market.
The analysis is most relevant for economies with the most open capital accounts.
Countries where local equity markets are sizeable enough to provide an adequate landing berth for their overseas investments include Sweden, Switzerland, Taiwan, Canada, Japan and Saudi Arabia.
Japan, France, Italy and Britain stand out for their large bond markets.
However, when adjusting for existing asset mixes abroad and considering both the relative equity and bond capacity at home, the paper concludes that the currencies with the largest repatriation rankings are the Japanese yen, the Canadian dollar and the Swedish krona.
There are numerous caveats to the exercise, and multiple other ways for surplus countries to diversify investments.
* The writer is from Reuters
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