Limited alternatives keep global capital anchored to the US

Despite concerns about the US sustaining its economic growth and stock market returns, global investors continue to pour money into the world’s largest economy.  

Foreign capital now accounts for some 40 per cent of all investments into US equities, Temasek CEO Dilhan Pillay told a Bloomberg conference in Singapore last week, underscoring foreign investors’ enduring confidence in US outperformance. 

“The question I think we grapple with is, where do we rotate our capital into?” Pillay said. 

“The choice in the US is one thing, but the choice outside of the US is even worse to some extent in terms of volume and your investable space. 

“If you look at the promising markets in terms of equity performance… you look at India, you look at China, look at Europe in the last 12 months or so, the absorption capacity [for capital] is not there for rotation out [of the US] in significant levels.” 

When choices for geographical diversification are limited, Pillay said investors look at rotating into alternative asset classes, which come with currency risk considerations  

He said Temasek was looking to introduce more uncorrelated returns to equities and will increase its allocation to core-plus infrastructure as a result. Temasek does not allocate to fixed income or commodities, which might be used by other investors to achieve the same goal. These assets were likely to still be US dollar-denominated, however. 

As a result, the weakness in the US dollar becomes a huge problem for a non-US dollar-denominated investor because it eats into returns, Pillay said.  

The ICE dollar index, which measures the US dollar’s strength against a basket of six other currencies including the Euro, Japanese yen and the British pound, has dropped 8.5 per cent since the beginning of this year.  

“I’ll just give you one statistic: between 2002 and 2012, if you were Singaporean and invested US stocks, the S&P went up 30 per cent and the US dollar depreciated against the Sing[apore] dollar by 33 per cent, so you have minus 15 per cent in your returns,” he said. 

Hedging costs have also risen as that’s what the majority of foreign investors outside of the US now have to do, Pillay said. It’s come to the point where the fund has to look for a “natural hedge”.  

“It means I’ve got to be looking for things that give me, on a net basis, the return I expect for the risk associated. So some US dollar-denominated assets will not give me a net return that will justify my allocation of capital,” he said. Around 37 per cent of Temasek’s assets is US dollar-denominated according to its annual disclosures.  

But neither Pillay nor Singapore’s other sovereign giant GIC believe the US dollar’s status is being fundamentally challenged. GIC chief executive Lim Chow Kiat said at the same conference that a scenario of complete de-dollarisation whereby the US dollar ceases to be the reserve currency is unlikely to happen. 

“We don’t see that. There aren’t clear alternatives [to the US dollar],” Lim said. 

“If you have a very high exposure to a particular currency or country adjusting it down 10 per cent is not unusual. 

“I would say that there are enough levers for investors and other participants to adjust their [currency] position without causing a big problem.” 

Both funds are still deeply committed to the US market. This July, Temasek chief investment officer Rohit Sipahimalani reiterated the fund plans to invest an additional $30 billion in the US before 2030 and said it is “well ahead of that pace”.  

Similarly GIC boosted its US equities allocation in the year to March 2025 despite reservations around high valuations and the ability for companies to meet earnings expectations. The country remains the biggest recipient of its capital.  

“US exceptionalism, for the time being, doesn’t look as though it’s going to be at risk,” Temasek’s Pillay said. “But you do have things that could cause a little bit of fraying.” 

“It might be that the structural issues we face in the United States are issues that have to be thought about in your risk analysis, but the rotation [of capital out of the country] is not easy, and that’s the reality.”