As global investors consider reducing their exposure to US financial assets, the key question is where money flowing out of the US will go. While Europe may be the obvious destination, relative value metrics may favour emerging Asia.
Even though US equities have recovered from the steep losses suffered in the week following US President Donald Trump's announcement of his "Liberation Day" tariffs, the same cannot be said of the US bond market. Since hitting a recent low on April 4, the 10-year Treasury yield has spiked by around 50 basis points, with bond investors demanding more compensation for the risk of holding longer-dated US debt. Worryingly, the benchmark Treasury yield has surged higher than nominal US GDP growth -- a key risk measure.
Additionally, the usual positive correlation between Treasury yields and the US dollar has broken off, as rising yields are no longer attracting money to the "safest" asset in the world. Broad-based depreciation of the greenback suggests that -- despite the equity rebound -- many US assets are being sold and the funds are flowing into markets whose currencies are appreciating.
The euro's almost 10% rise against the dollar this year suggests that a significant portion of the capital flowing out of the US is going to Europe.
Further monetary easing by the European Central Bank should promote economic activity, as should the expected surge in fiscal spending following Germany's recent constitutional reform, which approved partial removal of the "debt brake" for infrastructure and defence spending.
The fiscal splurge is already offering a boost to European equities -- the surprise winner thus far in 2025 -- especially defence, industrial and technology stocks.
But there are reasons to question the new "European exceptionalism" narrative.
One likely cause of investors' growing apprehension with US assets is the Trump administration's apparent inability to narrow the country's gaping fiscal deficit or reduce its debt-to-GDP ratio, which has risen to more than 120%.
But elevated debt metrics are also an issue across the pond, as they are found in Italy (135% of GDP), France (113%) and the UK (96%). Importantly, both Italy and France have seen their 10-year bond yields rise above their nominal GDP growth rates.
While the latter metric is also true of Germany, the country's debt load is modest at only 62% of GDP, so the statistic mostly reflects a stagnating economy that's about to get a spending boost.
Fiscal expansion in Europe will likely continue to benefit the region's equities, but whether it is good news for fixed income investment there is still an open question.
Meanwhile, in emerging Asia -- another potential destination for US capital outflows -- the debt picture is better and the growth outlook is stronger.
Benchmark bond yields across the region have been declining since October 2023, speaking to fixed income investors' limited concerns about Asian countries' fiscal situations. In fact, yields in China, Thailand and Korea are all below those in the US.
Modest debt burdens mean there is also plenty of room for more fiscal stimulus in many countries, which could improve consumption, while the benign inflation environment should enable central banks in the region to continue cutting rates to stimulate growth.
Emerging Asia also offers far more high-growth, technology companies than Europe. The release of the affordable Chinese AI model, DeepSeek, Beijing's focus on semiconductors and advanced manufacturing and the country's EV dominance could all attract tech-focused investors looking for an alternative to the US.
Even though European equities have outperformed their US counterparts significantly in 2025, the 12-month forward price-to-earnings multiple of the major European index, the STOXX50, is considerably lower than that of the S&P 500, at 15.4x and 21.0x, respectively, as of May 23. But the major emerging Asia equity index, the MSCI Asia ex Japan, is even cheaper at 13.4x.
Earnings growth forecasts are higher in Asia than in the US or Europe through 2026.
Reallocation of assets from the US could have a more positive impact on Asia. Let's say 5% of the US free floating market cap of $58 trillion, or $3 trillion, moves out. That would be 36% of Asia's market cap, but only 22% of Europe's.
Given emerging Asia's benign debt environment and positive growth outlook, both the region's equity and fixed income markets have the potential to benefit from the death of American exceptionalism. Reuters
Manishi Raychaudhuri is the founder and CEO of Emmer Capital Partners Ltd and the former head of Asia-Pacific Equity Research at BNP Paribas Securities.