Key Takeaways

• Investment in international securities – acquisitions of equities as well as corporate and government bonds in overseas jurisdictions are an increasingly important part of the United States’ economic links with the international economy.
• Portfolio investment ^[1] has grown rapidly in recent decades, rising faster than exports. The United States now invests more overseas in securities than it does in international foreign direct investment (FDI).
• These investments yield strong returns to U.S. investors, who on average earn more on securities than on their direct investment. In addition, U.S. income from investments in international securities has also grown faster than either exports or direct investment derived inflows.
• Increasing overseas income, when cycled back to the United States, helps fuel jobs and growth here at home. Therefore, it underlines how important it is for policymakers to recognize the role played by U.S. investments in international securities and to support the ability of U.S. investors to maximize such opportunities.

Introduction

The liquidity and openness of the U.S. and global financial markets are increasingly important to U.S. economic relationships with the rest of the world as well as the role these linkages play in U.S. economic growth and job creation. Below, we examine the growth in this dimension of external U.S. economic relations.

Cross-border securities investments strengthen the economy

Investment in cross-border securities yields many economic benefits. Typically, the United States has benefitted both from U.S. investors through outbound portfolio investment overseas and via foreign investors’ access to U.S. capital markets. Open markets give U.S. investors the opportunity to diversify their portfolios, improving risk management and fostering a higher level of savings and investment.^[2] Portfolio investments are also economically dynamic. U.S. investors earn investment income, such as dividends on portfolio assets, that can help strengthen incomes back home, in addition to the value of the underlying investments. U.S. participation in foreign capital markets also helps support U.S. manufacturers and service providers with operations in these markets. Finally, when foreign investors purchase U.S. securities, they are helping boost U.S. investment and job creation fueled by robust capital formation.

US cross-border capital markets investment have grown substantially

The value of equities and bonds held by U.S. investors in foreign markets has shown significant growth in recent decades.^[3] It quadrupled through the 1980s and 1990s, tripled in the 2000s, and has doubled again over the last two decades. In 2021, Americans held $16 trillion in portfolio assets in overseas markets.^[4] This growth reflects a combination of: liberalization in the 1970s and 1980s making it easier to buy assets abroad; technological advances facilitating cross-border securities trading; and innovation boosting the range of tradeable products.

Within the rapidly increasing availability of securities that Americans own overseas, the relative importance of securities investment compared to other types of overseas investment has also risen significantly (see Chart 1).

At the beginning of the 1980s, U.S. investors held only around one-third of their assets in securities relative to FDI where U.S. investors own majority stakes in foreign firms and have operational control of their business. In the early 2000s, Americans began holding a higher share of their overseas-owned holdings in portfolio assets compared with FDI; in recent years around 45% of U.S. assets held overseas represent securities and only 30% in FDI.

In the past three years, the value of total equity investment alone – before including debt securities – has outstripped that of FDI. This is partly indicative of the portfolio distribution between equities and bonds shifting. In the early 1980s, U.S. investors held around three-quarters of their foreign portfolios in debt securities. Since then, the ratio has reversed, with equity holdings accounting for almost 75% of overseas portfolio assets in 2021.

Chart 1: Overseas portfolio assets are the largest type of foreign investment holdings by US citizens (type of investment % of total overseas investment)

Inbound portfolio investment into the United States has also doubled in the past decade and was worth $28 trillion as of 2021. This is split evenly between equities and debt instruments with the latter comprised with more U.S. treasuries than corporate bonds – foreign investment in U.S. equity securities is comparable to that by U.S. investors overseas.

Returns on overseas investment in securities is also a growing source of foreign income for US investors

When U.S. investors purchase securities in foreign markets, they expect a return on investment and anticipate an increase in the value of the underlying asset.

Portfolio investment income was worth over $400 billion in 2021. This represented a 40% increase over a decade, a faster rate of growth than all other components of overseas income recorded within the U.S. balance of payments with the rest of the world – the national balance sheet of what the United States spends, invests, or transfers abroad versus corresponding inflows from overseas. This growth has outstripped a 20% increase in income from goods and services exports and 23% in income generated from FDI over the same period (Chart 2). The increased importance of overseas portfolio investments makes these assets an increasing generator of U.S. income and wealth for investors, including retirees and other retail investors, both in absolute dollar terms and relative to other forms of international transactions.

Chart 2: Income from portfolio investment has risen faster than from Foreign Direct Investment or exports in the past decade

The rates of return on overseas portfolio assets are relatively stable, despite periodic variations in the underlying performance of economies and capital markets. Over the past 20 years, returns have averaged slightly more than 3% and have moved within a 1 percentage point range – between 2.5% and 3.5% almost consistently. The variance of portfolio income returns is around a fifth of that of FDI, currency deposits and loans.

Finally, rates of return that U.S. investors earn overseas typically exceed those that foreign investors make on their U.S. holdings of equities and debt, averaging around 2.5% in the past decade. That means every dollar of investment in foreign securities by American citizens earns more than overseas investors earn on a dollar of holdings of U.S. securities.

Geographical patterns in US securities investment evolve slowly over time and the biggest markets are still the advanced economies, especially those in Europe

The geographical composition^[5] of inbound and outbound portfolio investment tends to evolve slowly; the outstanding stock of securities in any year is huge relative to the flow – trillions of dollars compared with annual flows in the billions – reflecting many years of cumulative investment. Around a quarter of U.S. securities investment overseas is with the European Union, United Kingdom (UK), Mexico, and Canada. The Asia-Pacific region is around a fifth. Nonetheless, there are some interesting features discernable in the data.

First, the proportion of U.S. investors’ portfolios allocated to UK securities has declined since the Brexit referendum. However, this continues a trend seen since earlier the decade, before the 2016 vote. The United States. holds 11% of its international portfolio in UK-based assets – still the largest single destination by country for U.S. investors.

Second, the share of U.S. portfolio investment in China remains small but has risen sharply in absolute terms. The overall dollar value of Chinese securities held by U.S. investors has almost tripled over the past five years and risen 12-fold since the start of the century. So, while just under 2% of U.S. foreign securities assets are in China, with a slightly greater weight in equities than debt instruments, growth continued at recent rates would leave Chinese investments comprising a double-digit share within 10 to 15 years.

Data on income associated with that investment – or that from any other country – is not available. That said, investment income from China generally represents a higher share of the total than China represents in foreign securities holdings. Similarly in India, there has been a rapid rise in the absolute value of securities holdings in that market, even though it is still a relatively small proportion of the total at 1.5%.

Trade and regulatory policies can further US investment and income opportunities

A general takeaway from this analysis is that U.S. policymakers should recognize the value cross-border securities investment plays in overall U.S. economic strategy abroad. Indeed, maintaining an open international securities market for U.S. investors should be a continued focus for both trade negotiators and U.S. financial regulators alike.

In trade and investment policy, the United States should seek to tackle barriers in overseas markets that impede the ability of U.S. investors to purchase equities or bonds. Expanding and deepening U.S. investors’ ability to hold foreign securities would also enhance the $400 billion income already generated from overseas markets as new sources of dividends and other returns open up. Much of this income from abroad will then be available for firms and market participants to invest back home in the United States.

These opportunities are likely to be more forthcoming in geographies beyond the well-established markets of Europe, North America, and parts of Asia, as such jurisdictions are less likely to have liberalized in the way existing investment destinations have. They may also offer higher returns as a result of a relative scarcity of existing foreign capital.

On regulation, certain local rules occasionally impede efficient cross-border investment flows, including in securities. For example, regulators should seek to enhance opportunities for cross-border investments where foreign regulators can demonstrate they have equivalent rules in place that promote safety and soundness. Given the evolving nature of regulatory standards, U.S. and international policymakers should continue to focus on how best to strengthen efficient and effective regulation of cross-border investment flows.

Examples of where the United States can constructively raise these issues are the EU/U.S. Financial Forum and the UK/U.S. Financial Regulatory Working Group, both of which meet twice a year. But there are also important dialogues with U.S., Mexico and Canada Agreement partners and in Asia – both on trade and investment matters and in financial regulation.

Finally, there is the broader issue of international competitiveness. While the United States presently leads the world in financial services, other countries are seeking to enhance their own global position in financial markets, which means allowing investors may take advantage of opportunities overseas as well as ensuring the domestic market is an attractive location for foreign investors.

For example, in the United Kingdom, regulators are charged with a secondary objective to advance long-term UK economic growth and competitiveness, including for the financial sector. Others such as Australia, Hong Kong, Singapore, and Switzerland have embedded similar approaches in their frameworks.

U.S. policymakers should continue to be mindful of developments in other jurisdictions to ensure the future of U.S. competitiveness. Given the critical role it plays in supporting the U.S. main street economy and U.S. taxpayers, financial services should continue to be fully integrated into the U.S. international economic strategy by the entire U.S. government – in the federal administration, U.S. financial regulators, and Congress.

Conclusion

The role of portfolio investment in the external-facing economy has increased significantly in recent decades. In addition to rising significantly in absolute terms, investment in securities abroad has not only outstripped that of FDI but has also seen an increase in its importance to U.S. income from the rest of the world. These developments benefit the overall economy, and policymakers should work to ensure these trends can be consolidated and built upon where appropriate. From a policymaking perspective, that means ensuring strategies with the rest of the world that properly factor in the role that the capital markets play for investors and seeing them as fully complementary to the contribution of exports to U.S. economic growth.

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Peter Matheson is Managing Director, International Policy & Advocacy at SIFMA

^[1] Foreign portfolio investment (FPI) consists of securities and other financial assets – principally equities and bonds – held by U.S. investors in another country. Unlike Foreign Direct Investment it does not provide the U.S. investor with direct ownership of a company’s assets

^[2] https://www.oecd.org/investment/investmentfordevelopment/2764407.pdf

^[3] Most data for this blog is derived from BEA international statistics: https://apps.bea.gov/iTable/?reqid=62&step=5&isuri=1&product=5 https://apps.bea.gov/itable/?reqid=62&step=1

^[4] All data on outbound and inbound investment positions can be found at https://apps.bea.gov/iTable/iTable.cfm?reqid=62&step=5&isuri=1&6210=5#reqid=62&step=5&isuri=1&6210=5

^[5] https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/shchistdat.html