The German economy is weak, but the DAX is higher than at the start of the year despite recent losses. This is not the result of domestic strength: US President Trump is driving capital out of his country. (archive picture)
Keystone
Europe’s stock exchanges overtook the US markets in the first half of 2025 for the first time in many years. According to investment managers and economists, international investors have withdrawn billions from the US markets and relocated to Europe.
The main reason for the capital flight from the United States is therefore Trump’s tariff threats and erratic changes of course. This means that international money flows have changed direction, at least for the time being. In previous years, immense sums flowed into the USA.
The main European winners are the stock exchanges in Germany, Spain and Italy, each with double-digit price gains. The DAX has risen by around 16% since the beginning of the year despite the recent losses. The US stock markets, on the other hand, have only recorded meagre gains of less than two percent.
Investor money sloshes back to Europe
“Numerous indicators point to a clear movement of investor money from the USA to Europe, but also to other regions such as Japan,” says Ludovic Subran, Chief Investment Officer at Allianz, who is primarily responsible for investments. With almost 2.5 trillion euros in invested capital, the Munich-based Dax group is one of the international giants of the industry.
Previously, big money from all over the world had been flowing into the US financial markets for years. One consequence is that shares in the US are expensive in terms of corporate profits, but comparatively cheap in Europe. “The cumulative net position of portfolio investments in the US is estimated to be around 17 trillion dollars by the end of 2024,” says Vincenzo Vedda, Global Chief Investment Officer at DWS, the asset manager of Deutsche Bank. DWS is also a heavyweight with a good trillion in assets under management.
The “rediscovery” of Europe
“This has now changed,” says Vedda. “A strong overweighting of the USA by fund managers at the end of 2024 has turned into a significant underweighting.” Vedda cites two trends: “Firstly, the rediscovery of Europe and its equities. Interest has come from both Asia and the US, but Europeans themselves have also rediscovered their “home market”.”
Secondly, according to Vedda, many investors felt the urge to “reduce their US exposure and diversify more strongly.” In addition to the political developments in the US and the fact that many investors had previously built up a very large overweight in the US, the main driver was also concern about a further weakening of the dollar.
International payment balances are not yet available, but the inflows and outflows of ETF equity funds are public. BayernLB Chief Economist Jürgen Michels refers to data from the US financial information service provider Morningstar. According to this, EUR 26 billion flowed into European equity funds in the first quarter of 2025. euros flowed into European equity funds in the first quarter of 2025, after twelve quarters – i.e. three years – of net outflows. In April and May, a further EUR 22 billion net flowed into European funds.
Dwindling confidence in the USA…
“The uncertainty caused by US politics and dwindling confidence in the USA is likely to have played a major role in this development,” says the economist. For example, there was a noticeably strong net outflow of funds from all US funds in April – after Trump announced his “Liberation Day” and the biggest US tariff increases since the days of the Great Depression in 1930.
… and a little more optimism in Europe
“However, the increased interest in European equities is also driven by greater confidence about the prospects in Europe,” says Michels. According to the BayernLB chief economist, the new German government’s fiscal package has contributed to this. “Against this backdrop, investors no longer seem willing to accept the historically unusually high valuation premium of US equities over European equities.”
Italy more solid than the USA?
It is not only the stock markets that are striking: the USA is currently paying significantly higher interest rates of around 4.4 percent for ten-year government bonds than Italy at 3.5 percent. Traditionally, Italian bonds tend to have higher interest rates – the risk premium for the country’s high level of debt.
This has also happened in the past, according to the experts surveyed. “Nevertheless, the recent rise in US interest rates compared to Italy indicates that markets are increasingly concerned about US government debt. At the same time, the fiscal policy situation in Italy has improved significantly,” says Allianz chief investor Subran.
US government debt is rising rapidly
This is because the liabilities of the United States have almost doubled in the past ten years: from 18.1 trillion dollars in fall 2015 to 35.4 trillion in fall 2024, according to data from the US Treasury Department. During his first term in office, Trump drove up debt despite the US economy still performing well at the time, while his successor Joe Biden fought the coronavirus pandemic with loans.
“Nevertheless, the US dollar will remain the dominant currency in the medium term and US investments will remain the backbone of the global financial world, not least due to a lack of alternatives,” says Allianz’s Chief Investment Officer.
President Taco
As Trump has so far only implemented his original tariff threats in a watered-down form, the financial markets’ fears of escalating trade wars between the US and the rest of the world have also eased somewhat. The US president has earned himself the nickname “Taco” in the financial world for his tendency to quickly back down after making martial threats: “Trump always chickens out”.
However, the consensus view is that the trend could continue to a lesser extent in the second half of the year. “We think that the urge of international investors to gear their portfolios somewhat less towards the US is likely to continue,” says DWS chief investor Vedda.