As the post-war international order unravels, investors could pull back from cross-border investments—triggering major disruptions in global financial markets.
Over the past few decades, globalization has reshaped the financial landscape, driving unprecedented capital flows between major economies.
However, rising protectionism, fragmented international economic relations, and heightened geopolitical uncertainty could fundamentally alter global investment strategies.
According to Torsten Slok, chief economist at Apollo Global Management, we are witnessing a shift from globalization to segmentation, a trend that may lead to a greater concentration of capital within national markets. This phenomenon, known as home bias, could reduce cross-border investment, increase market volatility, and significantly reshape the global investment landscape.
Until 1989, the United States was a net exporter of capital, maintaining a positive Net International Investment Position (NIIP). In recent decades, however, the U.S. has become a top destination for global capital.
As of September 2023, the U.S. NIIP deficit hit a record $23.6 trillion, reflecting a $5 trillion increase from the previous year. The massive influx of foreign investment has pushed the nominal value of U.S. assets held by foreign investors beyond $50 trillion, compared to roughly $40 trillion in U.S. assets held abroad.
Despite a general decline in cross-border capital flows between 2017-2019 and 2022-2023, the U.S. share of these flows nearly doubled from 23% to 41%, according to the International Monetary Fund (IMF). This points to an excessive concentration of investment in U.S. markets, a trend that could reverse in a more protectionist environment.
The 1990s and early 2000s marked the peak of economic globalization, with a surge in capital flows to emerging markets. According to the Institute of International Finance, capital flows to these economies increased sevenfold between 1990 and 2000, and then again between 1999 and 2007.
This expansion was fueled by factors such as financial deregulation, lower trade barriers, China’s rapid economic growth, the creation of the euro, and technological advancements. However, many of these drivers have weakened in recent years, raising concerns about a potential stagnation in globalization.
If Slok’s vision of “segmentation” materializes, the U.S. stock market could face significant pressure. Wall Street, which has been a primary beneficiary of foreign capital inflows, could experience headwinds if global investment patterns shift.
At the same time, Japan—boasting a positive NIIP of $3.3 trillion and more than $10 trillion in foreign-held assets—could see a repatriation of capital. While this trend has been observed before, it could accelerate in a more segmented global economy.
In the eurozone, the NIIP remains relatively balanced, but gross foreign-held assets total around $39 trillion. Even a partial repatriation of these funds could have major implications for the euro’s exchange rate and European bond markets.
Another key player is China, currently the world’s second-largest recipient of foreign direct investment. As trade tensions between Beijing and Washington escalate, China may be forced to seek alternative investment destinations and reduce its exposure to the U.S. dollar.
While it is too early to declare the end of globalization, recent economic and geopolitical trends indicate a growing fragmentation of global markets. Should capital increasingly shift toward domestic rather than international assets, we could witness heightened financial volatility, a redefinition of emerging markets, and a possible weakening of Wall Street’s dominance in global portfolios.
Original article published on Money.it Italy 2025-03-23 06:38:00. Original title: Dalla globalizzazione alla frammentazione. A farne le spese sarà Wall Street?
