Our Chief Asia Economist Chetan Ahya discusses three key
decisions that will determine Asia’s international investment
position and affect currency trends.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan
Stanley’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 PM in Hong Kong.
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
savings should be allocated to the U.S.? Or should they hedge
their 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. 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’s safe haven
status has already led to U.S. dollar depreciation. And our macro
strategists expect further depreciation of the U.S.D by another
8-9 percent by [the] 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. Out of the total international
investment of $46 trillion dollars, Asia’s securities portfolio
alone is worth $21 trillion. And of that, $8.6 trillion is in
U.S. assets as of [the] first quarter of
2025. Now here’s an interesting point:
China’s holding had already peaked in 2013, but Asia ex-China’s
holdings of U.S. assets has been increasing. Asia ex-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 savings. Asia’s current account surplus remains
high—at $1.1 trillion in the first quarter. 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 percent 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 their U.S. investment position and we see
increased hedging demand as one reason why Asian currencies have
strengthened recently. Take Taiwan life insurance—often seen as
[a] 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 [the]
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. 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 enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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