After years of favouring US dollar assets, Asian investors are training their sights across a broader horizon, with a particular focus on European markets, according to leading fund managers.

The shift can be gleaned from recent data on investment flows from corporates, central banks, households, and financial institutions in countries like Taiwan, Japan, and South Korea.

Ecaterina Bigos, chief investment officer for Asia ex-Japan at AXA Investment Managers ( AXA IM Core ), says Asian investors are looking at European assets as part of a diversification strategy, although their preference for US dollar-based investments is expected to remain.

In a paper published on August 29, Bigos makes a compelling argument for diversification away from US dollar assets, citing data from Morgan Stanley, J.P. Morgan, and Morningstar to assert that while Asian investors have been overallocating to US assets over the past decade, they are now redirecting record sums to global equity funds that exclude the US market.

This coincides with the changing outlook for European equities, which are becoming more appealing than their US counterparts.

Low valuations

In a separate paper, LEO Wealth CIO Harmen Overdijk maintains that many of the structural headwinds buffeting Europe are now fading, while valuations remain historically low. European equities are still quite a bit cheaper than US peers across all sectors. The private sector’s debt load stands at its lowest level in 17 years, and European banks are now in a position of strength, he adds.

Bigos notes that Asia’s gross international investment position has doubled in the last 13 years to US$46 trillion as of Q1 2025, spread across equities, government bonds and credit, foreign direct investments, FX deposits, loans, and reserve assets.

Of that amount, Asia’s securities portfolio, including securities holdings within reserve assets, those controlled by central banks represent US$21 trillion. By another measure, Taiwan is currently holding more than 100% of its GDP in US dollars, followed by Japan at 68% and South Korea at 40%.

“Asian investors’ overallocation to US assets, or dollar bias, has certainly been a long-standing trend, but market conditions and investor sentiment are now shifting towards rebalancing,” says Bigos.

“The US administration’s ‘America First’ policies, as well as divergent monetary and fiscal policies, are gradually weakening the links between global economies, with investors increasingly recognizing the value, and need, for international diversification. In addition, a weaker US dollar has caused ever-rising pressure on Asian countries with large US holdings.”

Global funds gain favour

Asian and European investors directed US$2.5 billion to global funds, ex-US mutual funds, and exchange-traded funds ( ETFs ) between the start of December 2024 and the end of April 2025, marking the highest monthly total record, according to data from Morningstar.

“The inflows also mark a reversal after three years of net withdrawals. Global equity funds that exclude US stocks had been out of favour for years, amid a sustained rally on Wall Street for most of the past decade that has attracted foreign investors,” Bigos says.

However, investors pulled a net US$2.5 billion from these funds between 2022 and 2024. During that period, the MSCI World ex-USA index gained just 7%, compared with a 25% rise in the S&P 500, Morningstar data show.

“Looking ahead, Asian investors ( and investors more broadly ) heavily exposed to US assets are likely to consider Europe and other international opportunities, in a bid to find a path to more balanced, and potentially more resilient, portfolios,” she says.

US growth below expectations

Bigos’ assessment is echoed by Overdijk, who notes that while European equities have underperformed US stocks by 220% since 2007, there are a number of factors that have led investors to warm to European equities.

One of these is that US economic growth has not lived up to investors’ expectations, unlike in the eurozone, where economic performance has surprised on the upside. For example, Germany’s stimulus package amounting to €1 trillion has lifted growth expectations for the bloc and supported investors’ optimism towards Europe, Overdijk says.

He also cites the lack of diversification in US equities, whose performance has relied heavily on technology stocks, as well as the valuation gap between US and European equities.

“While the US equity market has rebounded over the last three months, propelled by Nvidia and Microsoft, European outperformance is likely not over, and Europe remains a compelling investment destination for investors. Admittedly, European equities have been cheap compared to US ones for a very long time, which did nothing to stop the structural underperformance of past decades,” says Overdijk.

Concentration risk

At a time of heightened concentration risk, the valuation gap really matters as cheap European equities offer more protection against adverse shocks than US stocks do.

“The additional risk factor is that we are seeing rising concentration in the market driven by one factor, particularly AI. Nvidia and Microsoft account for almost half of the S&P 500 returns this year, as opposed to a much broader rally in European equity markets,” he adds.

Bigos says the diversification trend is not limited to equities, noting that investors are also diversifying away from the US bond market, driven by divergent monetary and fiscal policies.

“The interest rate differential between Asian economies and the US has left many investors looking for alternatives. European bond markets are becoming increasingly attractive to investors seeking high-quality alternatives, with less prohibitive hedging costs, due to the narrower interest rate differential to most Asian economies,” she says.