Will the real money pivot to Europe?

Katie Martin (0:06)

Pushkin. Big investors have got themselves into a bit of a pickle. For the past few years, in fact, the past few decades, asset managers all over the world have bought more and more and more US stocks. Somehow, we've ended up in a world where the US makes up 25% of the world's economy, ish, but about 70% of the big global stocks indices. Investors have just been treating it like home. Now, obviously, forever, that's been fine. Now, it's a little bit less fine. So the great rotation away from the US is upon us. Today on the show, we're asking, what is the new normal? And will Europe manage to snatch defeat from the jaws of success yet again?

You're listening to Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in very chilly London. I'm joined in the studio, unusually, by the FT's very own Ian Smith, a reporter also in London, who covers anything and everything to do with markets. And he's here making his Unhedged debut. Ian, welcome.

Ian Smith (1:16)

Thank you for having me.

Katie Martin (1:17)

Now, you used to have a nice life writing about insurance at the FT.

Ian Smith (1:23)

I did.

Katie Martin (1:24)

For some stupid reason, you decided to move over to markets from insurance. Are markets driving you round the bend?

Ian Smith (1:31)

Well, I seem to have the reverse Midas touch when it comes to the markets. Because before I was the insurance correspondent, I was the Deputy News Editor with you on markets. I joined in 2019 just before the COVID sell off. And then I had three quiet years on insurance and have come back. So I think I am the problem. But I'm very happy to be doing this and happy that we're doing our own great rotation away from the US to Europe with our all European cast.

Katie Martin (1:53)

We don't need those guys in New York.

You and I spend a large chunk of our life talking to investors, big money managers, right? They run money for insurance companies or for pensions or just investment management, all this stuff. And for me, pretty much every conversation at the moment is like, whoops, we're massively overweight the US and we kind of didn't really intend to do that. And now all of a sudden there's lots of political and economic risk attached to that that wasn't there before. I mean, how much is this coming across in your conversations?

Ian Smith (2:29)

Massively. Investor confidence from Europe and the US has just been shaken in recent months. And you can view it across US policy making, tariffing penguins, the Federal Reserve independence, that coming under question, but also how investors have been burnt by this massive bet that they've made on US equities.

Katie Martin (2:48)

Yeah.

Ian Smith (2:48)

And in large part, when it comes to stocks, they haven't hedged out the currency risk because in times past, they've benefited. The dollar has strengthened with all these inflows into US assets. That's added to the returns when they've been translated back into European currencies.

Katie Martin (3:01)

Yeah.

Ian Smith (3:02)

But now we have the reverse happening. And if you look at the S&P 500, it's down around 4% in dollar terms this year. But if you look in euro, that's about 12%.

So it's been a massive increase in the pain felt by European investors that has left them while they are also questioning things like US rule of law, the strength of institutions. They're also saying, not a hedging this currency risk has really hurt us.

Katie Martin (3:25)

Yeah. So there's pain coming from all sorts of different directions, right? If you're a European investor in the States. So first of all, there's just like big tech has rolled over, right? A lot of those bets on big tech stocks like Nvidia have not been doing so well past a couple of, well, past few months, really. That kind of makes sense. Something like shoots all the way to the moon. It's going to fall a little bit back down again. And there is this new challenge to US tech from China, or at least in some form. Then you've got the Trump factor, the tariffs, the penguins, the whole thing. And as you say, people are worried about stuff like rule of law, which is not a trivial thing to worry about when it comes to thinking about where to put my pension. Thank you very much. I'd like you to think about this sort of thing. So yeah, US markets have had a horrible run. Just looking at my little screen here, the S&P 500, the big index of US stocks is down like 4% so far this year, whereas even the FTSE 100 in the UK is up 5%. This doesn't normally happen. And DAX in Germany is up 16 And that's again, before you get into the currency bit. So let's just unpack that a little bit. As you say, if you are a foreign investor in the US, you generally win because the stocks do great, just in and of themselves. And then you have a nice strong dollar, so you get a double whammy. Not happening.