RPT-COLUMN-Currency FOMO may yet draw US investors overseas: Mike Dolan

By Mike Dolan

LONDON, July 14 (Reuters) - The dollar's drop this year has supercharged the outperformance of global equities over Wall Street, yet U.S. investors remain heavily underweight foreign stocks. Americans playing catch-up could well magnify the gulf in returns through the rest of 2025.

Investment strategists have spent much of the past three disruptive months poring over blizzards of data on cross-border fund flows, largely to support the narrative that foreign capital is fleeing U.S. assets due to President Donald Trump's policy upheavals.

As is often the case, the reality is more prosaic than the fearful hand-wringing.

Morgan Stanley's recent dive, for example, showed ongoing foreign demand for U.S. equities, just at a slower pace following the April 2 tariff shock. If anything, they found U.S. investors were marginal net sellers of domestic equities.

"The sheer size of the U.S. stock market means it should still receive inflows, just less of them," Morgan Stanley's team concluded.

And now that U.S. stock benchmarks are back at record highs after a 20% round trip, the mood has turned somewhat. The thinking in some quarters at least is that - tariff fears notwithstanding - the storm has passed and Wall Street can rely on tax cuts, renewed tech enthusiasm and deregulation.

But the stark outperformance by many non-U.S. markets so far this year could yet mean 'FOMO' - or fear of missing out - may now come into play for U.S. savers looking abroad - mirroring the global scramble to load up on Wall Street in recent years.

At the very least, more significant and overdue rebalancing of U.S. investment portfolios may be in store.

The dollar's 10% decline against major developed market currencies .DXY in the first half of 2025, and its 13% swoon against the euro in particular, is a key catalyst - potentially both driving and feeding off the investment switch.

The MSCI all-country index that excludes U.S. stocks .dMIWU00000PUS has climbed almost 17% this year, almost three times the 6% gain in the S&P500 .SPX, flattered by currency gain on that index of more than 8%.

In dollar terms, euro zone stocks .STOXXE have zoomed 27% higher so far this year, while Germany's DAX .GDAXI boomed by 37% and Hong Kong's index .HSI is up 20%.

OVERSEAS FOMO

David Kelly, Chief Global Strategist at JPMorgan Asset Management, makes the point that after years of exceptional U.S. stock gains, most investors are still heavily underweight non-U.S. assets. The prospect of further dollar weakness from here could well draw them out.

"Even if it were an even bet whether the dollar and the exceptionalism premium would rise or fall going forward, investors are not positioned as if it were an even bet," Kelly wrote this week. "Prudence suggests they should spread their bets."

Morningstar strategist Amy Arnott noted how imbalanced a U.S. investors' portfolio holdings could now be simply as a result of inertia during years of massive U.S. gains.

An investor who started out five years ago with a portfolio mix of about two-thirds U.S. stocks and one-third international, and never rebalanced, would now hold about 71% of their portfolio in U.S. stocks, she reckoned.

The most recent fund flow data showed assets in international funds totalled about $4.6 trillion, about 26% of the total in all U.S. active and exchange traded funds.

Arnott points out that a more balanced market cap-based weighting would put 37.7% in international stocks. The argument for rebalancing is compounded by the much cheaper valuations available outside the U.S. and risk of exposure to the dollar.

"It's impossible to know if international stocks will lead or lag over any given period, but a healthy dose of international exposure can help insure you're not overly exposed to trends in the U.S. market," the Morningstar strategist wrote.

Of course, any move to rebalance now comes with numerous warnings about chasing overseas returns based on recent performance. How will the relative economies perform, and how will interest rates shift? How will the trade war pan out? What about sectoral biases and tech?

What's more, there's also some debate about whether the fraught global policy environment will just result in the return of home bias, much as Trump's economic team would seem to favor.

If that were the case, this trend may benefit Europe if the trillions the continent's savers have currently parked in the U.S. were repatriated - although it would also see U.S. investors just hunker down at home.

The decider may well be further dollar weakness - also assumed to be a welcome development by the Trump administration.

Global fund managers are already registering their most underweight position in dollars in 20 years, according to the most recent Bank of America survey, so perhaps the flight from the greenback is partly played out.

But if dollar weakness resumes and snowballs - which could be the case as U.S. interest rates tumble and trade and fiscal deficits yawn wider - U.S. investors may find it impossible to ignore the lure of foreign shores.

The opinions expressed here are those of the author, a columnist for Reuters