As investors across the world pour money into overseas markets, the danger of one country’s woes affecting other markets is becoming more real, the Nihon Keizai Shimbun reports.
In fact, a number of asset-backed securities in other nations invested in U.S. mortgages, including subprime loans, and are now suffering steep losses. And investors most likely to have put their money in such securities include hedge funds, many of which have sold stocks to offset the losses, further exacerbating international declines.
“The subprime loan issue is a problem for the global financial market as a whole,” said Yutaka Shiraki, senior strategist at Mitsubishi UFJ Securities. Indeed, the problem is said to be acute not only in the U.S., where the Dow Jones Industrial Average declined 4% last week—the largest weekly decline in four years—but also in Europe, Australia and Japan.
Data from the Bank of Japan, U.S. Federal Reserve and European Central Bank confirms that foreign investors’ holdings in these markets are all at record levels since 2000. In Japan, foreign investors hold 16.1% of stock and other capital holdings, and that jumps to 27% when applied only to listed stocks.
Cross-border capital flows topped $6 trillion last year and have grown at an annualized rate of 10.7% between 1990 and 2005, far exceeding global domestic product growth of 3.5% in that 15-year period, according to McKinsey.