This goes without saying — or at least it should — but valuation effects account for the lion’s share of the massive increase in foreign ownership of US assets.

Let me back up. This is topical. Foreign ownership of US assets, I mean. I suppose I don’t have to explain why, but just in case: Some worry foreign investors may be poised to rotate away from US equities and bonds due to governance concerns and the increasingly adversarial approach to trade policy adopted by the Trump administration.

Simply looking at the size of foreign holdings paints a misleading picture. Specifically, it shows that over the last 15 years, foreign ownership’s up almost $18 trillion across stocks and bonds, with the vast majority ($15 trillion) attributable to equities.

That’s not “wrong,” per se, but as the figure above, from Deutsche Bank’s George Saravelos, poignantly illustrates, 90% of that increase is due to valuation effects which, as he put it, “show[s] how important it is to avoid confounding valuation with flow effects in discussing US capital flows.”

That doesn’t mean this isn’t an important subject. It plainly is, and when you assess the situation by looking at the relative weights of US assets in European and Japanese investor portfolios, you’re left to ponder a sharp increase on both accounts.

Specifically, Saravelos and his colleague Michael Puempel calculated that “the share of total US portfolio holdings has quadrupled in Europe” since 2010 — from 5% to 20% — and doubled in Japan — from 8% in 2010 to around 16% as of last year.

As you can imagine, the dynamic’s more pronounced in stocks. The figures above, from the same Deutsche Bank note, also show European and Japanese holdings of US shares relative to the overall weight of US stocks in global equities, which is to say the light blue lines show the Underweight, plotted on the right scale.

Long story short, European investors are less Underweight the US (again relative to US shares’ overall heft in global stocks) now than they were a decade ago, while that metric for Japanese investors is roughly unchanged.

What’s the takeaway? Well, there are a few, or I suppose you could say there are two different ways to look at this situation.

The non-alarmist view says, to quote Saravelos, that foreigners “have merely passively tracked rising aggregate valuations of US equities and issuance of US bonds.”

A more foreboding read-through says that “tracking” exercise “has left foreigners — and especially Europeans — with a huge overweight in their portfolios relative to history, especially in US equity markets which tend to be currency unhedged,” as Deutsche Bank’s FX team wrote.

As Saravelos went on to emphasize, the hedging point’s important. He and Puempel estimated that in total, foreigners hold around $26 trillion of US stocks and bonds, so “a mere 1% increase in hedging” of those assets would “equate to roughly $260 billion in dollar selling, equivalent to the total bond and equity inflows seen over the last two years.”

Any way you cut it, they said, “a sustained shift in foreign investor USD allocation closer to historical norms has the potential to generate huge negative dollar flows.” The impetus for such a shift in 2025 is — and I’m quoting here — “global uncertainty stemming from, among other things, US institutional erosion.”