ROI-Who's most likely to 'Sell America?': McGeever

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

By Jamie McGeever

ORLANDO, Florida, Jan 28 (Reuters) - If the "Sell America" trade heats up, who is most likely to stoke the flames?

The world's exposure to U.S. assets is approaching $69 trillion, or $27 trillion net of Americans' foreign holdings, so there's no shortage of potential sellers should investors decide to "de-risk" from the United States.

The tumultuous first few weeks of the year provide a lengthening list of reasons why they might want to trim that record net "long" position.

Chief among them are ?unease over Washington's disdain for the rules-based global order, its dismantling of relations with close allies like Europe and Canada, and its repeated threats to slap punitive tariffs on its trading partners.

Of course, many of ?America's traditional allies are the biggest lenders to Uncle Sam, via their Treasury bond purchases. They're also the biggest investors in America Inc, amid the frenzy ?to take part in the U.S. tech and artificial intelligence equity bonanza.

BIG HOLDINGS, SMALL EXPOSURE

Foreign investors have roughly ?doubled their allocations to U.S. stocks and ?bonds in the last decade, led by particularly strong equity inflows, according to a Goldman Sachs report into cross-border asset holdings and exposures published in October.

So who would be most likely to reduce ?these purchases moving forward, or even bring some of that money home?

Japan is ?the obvious candidate. It's the third-largest foreign holder of U.S. stocks and largest holder of U.S. bonds in nominal terms. Japan's public and private sectors are sitting on around $1 trillion of equities and over $1.5 trillion of debt.

But Japanese investors' home bias is very ?strong, and their share of U.S. assets relative to their total holdings is ?modest. From a diversification ?perspective, the incentive to rebalance is pretty limited.

The Goldman report found that U.S. stocks make up only 19% of Japan's total equity holdings, and U.S. bonds are only 14% of their total debt investments.

U.S. bonds also account for 14% of euro zone investors' debt portfolios, but ?these purchases have been ramping up in recent years. European investors have almost doubled their exposure to U.S. Treasuries since the COVID-19 pandemic, and now hold around $2 trillion in total, according to Deutsche Bank. Souring U.S.-European relations could slow that buying or even reverse it.

SMALL COUNTRIES, BIG EXPOSURE

Ultimately, it's smaller countries or "middle powers" that appear most likely to rebalance away from American assets, based on the size of their U.S. securities holdings relative to their overall assets.

Norway, Canada and Denmark - which Treasury Secretary Scott Bessent recently disparaged as "irrelevant" - have the highest exposure to U.S. equities on a percentage basis, while Switzerland and, once again, Norway, ?have the biggest ?slices of their debt investments in U.S. assets.

One potential barrier to rebalancing international portfolios right now, however, is the exchange rate impact. The dollar has slumped to multi-year lows against the euro, sterling and a broad basket of currencies.

Repatriation risks turning dollar selling into a destabilizing rout ?that nobody wants. It could also supercharge already strong currencies, posing significant headaches for policymakers around the world. Switzerland springs to mind, with the safe-haven franc soaring to an 11-year high on Tuesday. Could negative interest rates be back on the table?

But given the sheer size of the world's net long U.S. position, some reduction of this exposure seems inevitable, whether through passive rebalancing or outright selling - especially if Big Tech's earnings and guidance in the coming quarters fail to allay AI bubble fears.

Goldman's analysts say U.S. stocks need to outperform non-U.S. markets by 4-5% this year to justify their historically high weighting in global portfolios. That didn't happen last year, and relative valuations suggest it may not ?occur this year either.

Diversification is almost always an attractive option, and that is now particularly true for countries overexposed to Uncle Sam.

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

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(By Jamie McGeever; Editing by Marguerita Choy)