Although risk appetite improved through the end of the year, investors used the recovery to trim their exposure to previously better-performing equity markets, with US portfolio weighting down significantly from highs early in the year, economists at the Bank of New York report.
Emerging markets are gaining share
“Despite the general recovery in risk appetite towards the end of the year, our data suggest that investors have used the recovery flow as an opportunity to reduce their exposure to stocks in previously high-performing markets. Compared with the highs seen at the start of the year – when the consensus view was ‘American exceptionalism’ – US positions at the end of 2025 are more cautious, with its share of global portfolios falling from 68% to just over 64%.”
“For Europe, the strongest period of performance was in late Q1 and early Q2, when a combination of tactical diversification away from the dollar following the ‘Liberation Day’ tariffs and the domestic defense theme pushed holdings to more than 11% of all portfolios. However, this number has also declined, although it is still above the sub-10% level seen at the start of the year. This suggests that markets remain supportive of the European reinvestment theme, although with less conviction than at the time Earlier in the year.”
“As US and Eurozone markets end the year near the lower end of recent ranges, emerging markets have picked up some slack. We expect this momentum to continue into 2026, as total positions remain very light in absolute terms, and a significant rise in exposures will not necessarily come at the expense of developed markets. Whether this translates into FX gains is another matter, as yield spreads continue to favor high hedging ratios. Export competitiveness pressures may also limit upside potential.”
