International portfolio investment holdings—2013 update

2 October 2014

Ousmène Jacques Mandeng, Global Institutional Relations Group, Prudential Investment Management

International portfolio investment holdings increased significantly in 2013. The increase was driven largely by investments in debt securities and a significant allocation to the U.S. The share of investments in the Euro area has also increased while investments in emerging markets declined. Portfolio country and securities allocation patterns continue to differ between all countries and emerging markets. International portfolio investments have continued to progress with the level of total holdings in 2013 being more than four times as high as in the early 2000s.

International portfolio investments, comprising equities and debt securities classified by the residence of the issuer, increased to US$44.1 trillion from US$37.1 trillion in 2012 and US$35.3 trillion in 2007.1 Investments have increased in the U.S. and Euro area, representing 21 percent and 31 percent of investments in 2013 from 17 percent and 31 percent in 2012, respectively. The share of investments in emerging markets, excluding off-shore financial centres, has declined to 10 percent from 12 percent in 2012. In 2013, international portfolio investments in debt securities constituted 56 percent of total portfolio investments. Portfolio investments in all countries as a share of GDP have increased to 60 percent in 2013 from 52 percent in 2012 (Table).

The share of emerging markets in investments from all countries declined to 2 percent in 2013 from 3 percent in 2012. In 2013, emerging markets held 38 percent of their investments in the U.S., 15 percent in the Euro area and 10 percent in emerging markets. Debt securities represent 42 percent of emerging markets portfolio holdings. Investments in emerging markets as a share of GDP declined to 14 percent in 2013 (Table).

Allocation patterns continue to differ by groups of countries. Investments in the U.S. and Euro area are dominated by debt securities representing 65 and 71 percent, respectively, of total investment holdings in 2013. In emerging markets, equities continue to dominate allocations. Allocations to the Euro area are significantly smaller in investments from emerging markets compared with all countries showing sustained large allocations to the U.S. Emerging markets also maintain a higher propensity to invest in other emerging markets debt securities compared with all countries. Overall investments from emerging markets increased relative allocations to equities in contrast to all countries that have increased allocations to debt securities.

Debt securities have progressively shaped international portfolio allocations. While the Euro area continues to attract the largest amount of international portfolio investments in debt securities, the U.S. saw the greatest increase between 2012 and 2013. Debt securities investments in the Euro area as a share of total debt securities allocations have continued to decline since 2007. Investments from emerging markets in debt securities dropped in 2013 after a significant increase between 2007 and 2012.

The level of financial integration continues to differ significantly between all countries and emerging markets. The low share in percent of GDP of international portfolio investments in emerging markets shows that international portfolio investments have a significantly smaller incidence in GDP compared with advanced economies. Emerging markets have remained net recipients of portfolio investments.

Recent portfolio investment allocation patterns affirm a selective rotation into U.S. debt securities. The decline of investments in emerging markets marks a reversal of a sustained increasing allocation through 2012. Emerging markets, dominated by equity securities, may have benefitted less from the increased allocation to debt securities. Overall, allocation patterns seem to suggest that debt securities have played an increasing role in shaping financial integration seemingly benefitting countries that offer attractive debt securities allocation opportunities.