(The opinions expressed here are those of the author, a

columnist for Reuters)

By Jamie McGeever

ORLANDO, Florida, March 24 (Reuters) - As the first

quarter draws to a close, financial markets are at a crossroads.

We could be seeing the early stages of a tectonic shift in

global investment flows, with a dramatic decline in demand for

U.S. assets from abroad. But it's also possible that this is

simply a pause and that the 'U.S. exceptionalism' narrative has

more chapters to go.

Net sales of U.S. equities by foreign central banks reached

$28 billion in January, and net sales of all U.S. assets by the

private sector totaled $74.8 billion, according to official

Treasury International Capital flows data.

These were, respectively, the fastest-ever pace of U.S.

equity selling by the official sector in a single month, and the

biggest monthly outflow of U.S. assets by private sector

investors in a year.

This abrupt reversal in flows goes a long way to explaining

the eye-opening underperformance of U.S. stocks against the rest

of the world so far this year. This gap has approached 15

percentage points in the past few weeks.

Of course, one month does not a trend make, and it will take

many more months of similar flows to reverse the tide - or more

accurately, the tsunami - of foreign capital that flooded into

U.S. markets in recent years.

TIC data shows that private sector net capital inflows into

U.S. stocks and bonds last year totaled $980 billion, following

a net inflow of $668 billion the year before and $1.6 trillion

in 2022. That's net purchases from overseas investors and net

selling of foreign assets by U.S. investors.

The total figure is worth repeating. In the last three

calendar years, private sector investors poured a net $3.25

trillion into U.S. assets. Little wonder that foreign investors

at the end of last year owned 18% of U.S. stocks, according to

Goldman Sachs. That's a record-high share going back to 1945.

At an average of more than $1 trillion a year, that pace of

net inflows was unlikely to be maintained. But does that mean

that January's pace of selling will persist? Not necessarily.

PARADIGM SHIFT?

Goldman Sachs' chief U.S. equity strategist David Kostin and

his team estimate that foreign investors will remain buyers of

U.S. equities this year, lured by the weaker dollar, attractive

prices due to the recent correction, and the unparalleled

liquidity of U.S. markets.

They reckon overseas investors will be just as committed

this year as they were last year, buying a net $300 billion

compared with $304 billion in 2024. They do note, however, that

"elevated political and economic uncertainty also create

elevated uncertainty around that forecast."

Appetite for U.S. assets will remain strong as long the U.S.

maintains an innovation-friendly tax system, flexible financial

system, commitment to property rights and a relatively low

regulatory burden, agrees Standard Chartered's head of G10 FX

strategy Steven Englander.

"Cyclical ups and downs in equity and other asset prices

would not erase this attractiveness in the long term, even if

the correction in U.S. equities continues, provided the

underlying positives remain in place," he says.

It is important to note that TIC flows reports are released

with a lag, meaning January's outflows don't account for the

notable market shifts seen in recent weeks. The February and

March reports could show massive outflows too.

There are good reasons why foreign investors have backed

away from U.S. assets in recent weeks - stretched valuations,

market concentration, the emergence of China's DeepSeek

artificial intelligence model, Germany's watershed fiscal

U-turn, and concern surrounding the Trump administration's trade

and foreign policy agendas.

This is all to say it remains unclear whether the recent

shift in investment flows is temporary or represents a true

paradigm shift. The next few months will be critical.

(The opinions expressed here are those of the author, a

columnist for Reuters.)