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US Cross-Border Securities Trading Trends: Forging New Patterns

Investment flow both to and from the US has been fundamentally altered by the financial crisis. As the global economy stages a slow recovery, it has seen cross-border investment flows being impacted, and in many cases there has been stagnation or even decline.

The financial crisis has impacted securities trading flows worldwide. For example, foreign transactions in US securities declined from an average net monthly purchase of US$79 billion in the January 2001 to June 2007 (pre-crisis) period to US$41 billion in the July 2007 to March 2012 (post-crisis) period. While trading flow was impacted in the early 2000s by the dot-com crisis, the major event to have affected their levels is undoubtedly the financial crisis. The slow recovery since the latter has meant that investment flow is improving. However, post-crisis flow has exhibited much higher volatility.

In the report US Cross-Border Securities Trading Trends: Forging New Patterns, Celent studies the nature of the change in investment flow for the US and how this varies across the bond and equity markets, various regions, and leading national markets globally. The report also looks at how investors across the leading markets are reacting to the circumstances and whether they continue to invest in the same regions, markets, and asset classes as they did earlier.

"The US economy has been resurgent after the financial crisis and is beginning to forge new investment relationships with high-growth markets across the world," says Dr. Anshuman Jaswal , Senior Analyst with Celent's Institutional Securities & Investments Group and author of the report. "The better economic performance of the Asian and Latin American markets means that the investment flow to and from these markets vis-à-vis the US has increased compared to Europe."

This report begins with an analysis of foreign investment into the US markets by region, looking at investment from Asia, Europe, Americas, and the Caribbean between January 2001 and March 2012. It then considers the US investment into each of these regions and how it has changed since the crisis. The next section looks at the investment flow to and from the US by products, that is, bonds and equity. Finally, the report looks at the investment relationship of the US with 16 of the leading financial markets around the world.

• Foreign transactions in US securities declined from an average net monthly purchase of US$79 billion in the January 2001 to June 2007 (pre-crisis) period to US$41 billion in the July 2007 to March 2012 (post-crisis) period. There was a marginal decline in the value of US investment for the corresponding periods which declined from US$10 billion to US$9 billion. Hence, while the investment flows into the US are still much larger than those going abroad, their magnitude is lower after the crisis.

• Among the regional markets, the average flows into the US from Asia-Pacific have remained at the same level of US$22 billion when comparing pre-crisis to post-crisis flows. This can be explained by the more robust nature of the Asian markets at present. The average flows from Europe have declined from US$34 billion to US$18 billion, while those from the Caribbean have declined from US$8 billion to US$2 billion. However, the investment from other American markets into the US has increased marginally from US$7 billion to US$8 billion.

• The investment flows from the US into the various regions have been affected differently. Asia has seen a decline in average investment flows from US$2 billion before the crisis to an outflow of US$1 billion after the crisis. There has been a similar decline in Europe, where American investment has declined from US$7 billion to US$3 billion. However, the flows into the Caribbean and other American markets have increased after the crisis. Average monthly outflows of US$1 billion from the US have been reversed, and the US is now investing an average of US$2 billion into the Caribbean market. Similarly, for the other leading American markets, an average monthly purchase level of US$1 billion by US investors has grown to US$4 billion. This illustrates the rising interest US investors have in nearby markets such as Brazil and Mexico and also the fact that the economies of these countries have been quite resilient after the crisis.

• Looking at the breakdown of investment into US securities, there has been a flight to safety since the financial crisis. The average foreign monthly investment into US Treasuries has risen from US$18 billion to US$37 billion. However, this has been accompanied by large declines in the foreign investment in US corporate bonds and agencies. The average monthly investment into corporate bonds has declined from US$27 billion before the crisis to only US$2 billion after the crisis. The average monthly investment into agencies has declined from US$18 billion to US$4 billion. There has been only a marginal decline for equities, however, with average investment declining from US$8 billion to US$7 billion after the crisis.

• The investment flows into foreign bond and equity markets have been affected differently. The average monthly investment into bond markets abroad has increased from US$3 billion to US$5 billion, while the flows into foreign equity have declined from US$7 billion to US$4 billion.

• There has been a rise in investment into APAC, Americas, and offshore financial centers. The countries which have seen higher US investment after the crisis include Australia, Hong Kong, and Korea in APAC; Brazil, Canada, and Mexico in the Americas, and offshore financial centers such as Luxembourg, Switzerland, and Cayman Islands. On the other hand, some of the main countries which have seen a decline or outflow of US funds include European countries such as France, Germany, the UK, the Netherlands, and some Asian markets such as China, Japan, and Singapore.

• Considering inward investment into the US, there has been a rise in investment from countries such as Hong Kong, Japan, Korea, Switzerland, Brazil, and Canada. The main countries from which investment has declined include European markets such as France, Germany, Luxembourg, the Netherlands, the UK, and other markets such as Australia, Mexico, Singapore, and Cayman Islands.

• In broad terms, the cross-border investment flows studied in this report declined after the financial crisis. However, these have recovered to some extent, and we are seeing new patterns emerging that are distinct from earlier ones.