Foreign investors to invest in US stock market because the return is the best (too obvious) and because there is a portfolio diversification effect.
As foreign investors, they have one more reason to invest in the US market: hedging.
As shown in the chart below, when a global crisis strikes (the dot-com bubble in 2000 and the financial crisis in 2008. In the case of COVID-19, the stock market rose too steep after the crash, so skipped the chart) the stock market plummets. But the dollar, which is a safe asset where investors flock to during crisis, goes up in value.
Source: Investing.com
As a foreign investor, owning US stocks means that owning two types of assets at the same time: USD and US stocks. So even if the stock market crashes, the value of foreign investors’ asset is affected less when converted to their home country currency.
Therefore, as a foreign investor, investing in U.S. stocks means that their assets are automatically hedged by the value of USD during crisis.
Foreign investors have no reason not to invest in the US stock market.
This article is also published on Macrotrend.
