Chart Your Course
In 1932, Ymer broke the ice—literally and figuratively—as the first diesel-electric icebreaker. She reminds us: even in the harshest seasons, careful navigation makes progress possible.
“As investors, we have to be pragmatic. My job is not to like or dislike [politics]; rather it is to navigate this turbulence in the best long-term interest of my investors. I want the businesses I invest in to be like icebreaker ships—juggernauts that sail on regardless of external disruptions.” -Guy Spier
By Nick Fisher, Portfolio Manager
Russell Napier, a respected financial historian and strategist, highlights that approximately 40% of U.S. equities are owned by foreign investors and institutions. This level of foreign ownership introduces a structural vulnerability, particularly as capital begins to repatriate in response to shifting macroeconomic and geopolitical dynamics.
This repatriation is not merely a theoretical risk—it is already being catalyzed by the resurgence of economic nationalism and protectionist policies across major economies. His theory asserts that investment decisions and asset price movements are primarily driven by shifts in the availability and direction of capital, rather than traditional economic indicators like GDP growth or corporate earnings (ie. recessions).
As a result, the U.S. large-cap equity market, long buoyed by persistent foreign capital inflows, now faces a potential structural headwind. Napier’s framework—centered on capital flow dynamics and financial repression—provides a compelling lens through which to assess the implications of these evolving global forces. Indeed, if you look at Large Cap US stock market returns, valuation expansion rather than earnings growth has had a much larger influence. This further underscores the strategic imperative and benefit of diversifying out of the overvalued markets and instead owning great businesses globally.
Doubleline Capital (one of our bond managers), weighed in recently saying that flows over the last 20 years (more than $20 Trillion) from international investors have significantly influenced US markets, especially the S&P 500. Purportedly, Norges Bank (the Norwegian Sovereign Wealth Fund) held 55% of its assets in the US stock market for example. Additionally, the Swiss National Bank (Switzerland’s Central Bank) holds more than $150B of US stocks. Why on earth would the Swiss National Bank feel the need to own US stocks?
This massive flow of capital from international investors have bid up prices to near record valuations. What if this tailwind for US stocks reverses? Trends would suggest that these investors will be investing more in their home countries. If international demand for gold is any indication, the reversal of flows is well underway.
James Aitken has recently been sharing his insights on capital flows. As a trusted advisor to many of the world’s largest sovereign wealth funds, Aitken brings a unique perspective. In a recent interview with Grant Williams, he remarked:
“The incentives that this [US Presidential] administration is giving to global capital is stark, clear, consistent and they are not bluffing. They are absolutely certain in the rectitude and robustness of their actions here. And I got to tell you, I hope they are right, but we need to prepare for more difficult days…If we get some sort of stupid squeeze here, this is your chance to chuck out anything [investments] you are still uncertain about. It applies to stocks; it applies to bonds and it applies to the US dollar. We are following their instructions to the letter and we hope they know what they are doing.”
Investors are tiptoeing out of US dollar assets. Not a run or a jog, but a tiptoe. But even a tiptoe when the world is colossally overweight the US by default, a tiptoe leaves a lot of footprints. There is one important point that is mechanical, it is not arguable, it’s mechanical and related to balance of payments and accounting, according to Aitken.
“If we take Mr. Trump seriously and imagine that he reduces the trade deficit in any given year by $1T, then mechanically, $1T less global surplus capital will be invested in US $ assets. That is a mechanical truism. Maybe they don’t care…but that is a mechanical fact.”
As difficult as it is today to imagine persistent global capital flowing back into global assets, or European equities, questions have been asked by politicians on this [European] side of the Atlantic,
"What are we doing? We keep saying that we don’t have the money. We have the money, it’s over there! If we need to refinance Guilts, particularly now because yields are high…the UK is tying itself in needless knots, so the fiscal situation is an absolute farce.”
Aitken goes on to say that for 20 years, every marginal dollar of UK savings has been automatically directed across the Atlantic. If the right incentives can be created to redirect that capital home — and if leaders have the will to act — good things might happen. The money, as it always does, will find its way to where it’s treated best. And across Europe, the same question quietly echoes in policy circles: how will the Eurozone fund this new era of defense spending and sovereign borrowing? For now, the answer could be — the S&P 500.
Yet, what happens when the world’s default allocation starts to shift? When even a tiptoe becomes a trend? The implications are profound. As capital begins to quietly redraw its borders, investors would be wise to consider whether their portfolios are prepared for a future that might look very different from the past.
In the meantime, we will continue to remain prudent in our investment principles, ignore the crowd, seek opportunity where others hesitate, and focus relentlessly on the long-term performance of great businesses. That has always been — and will remain — the core of our work at Pilot Wealth Management.