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Alexis A. Crow, “Diversification: A Practical Guide for Portfolio Rebalancing and Operational Excellence Amidst Continuing Policy Shifts,” ORF Special Report No. 295, Observer Research Foundation, January 2026.
Questions abound as to whether the degree of institutional change in the US has prompted a fundamental shift in investing and operating ethos for financial institutions, and a portfolio shift away from US-related assets for their clients. Notably, policy shifts have shown up in the value of the dollar, which is down roughly 8 percent against a trade-weighted basket year to date.[1] While central banks and retail investors have driven the price of gold to record highs, pension funds are investing in crypto assets,[2] and institutional investors continue to hedge their dollar exposure in order to reduce currency risk.[3]
On the other hand, recent multiple highs of US equity markets—propelled by the Magnificent 7—or ‘Mag 7’ stocks—has kept some of these calls for a ‘great diversification’ at bay. The investment frenzy surrounding GenAI is largely viewed as exogenous—that is, immune to policy shifts from Washington—and is not limited to liquid markets or technology companies. Catering to booming energy demand, real estate, infrastructure and private equity investors continue to direct capital toward electricity and power generation and data center development.[4] Some investors allocating trillions of dollars to GenAI in the US[5] also point to policy developments that have not yet culminated in worst case scenarios such as a less potent effective tariff rate.[6]
And yet, while volatility might be low, policy uncertainty remains high. Looking beyond trade and tariffs, potential changes to institutions which govern monetary policy, financial supervision, and regulatory oversight have the potential to stifle economic growth,[7] and may also amplify risks for investors in US assets.[8] In setting their strategy for 2026 and beyond, investors and executives should be guided by three key themes:
This can help position firms navigate inevitable waves of domestic and geopolitical uncertainty and to bolster sustainable returns over a long horizon.
For both quantitative and qualitative reasons, a variety of ‘push’ and ‘pull’ factors have pushed capital away from the US, and pulled it toward other geographies, such as emerging market developing economies (EMDEs), and to borderless assets, such as gold. This is the case for both foreign and domestic, and institutional as well as retail investors, and has unfolded in both public as well as private markets.[9] On the quantitative side, US equity markets – and indeed valuations across asset classes—look expensive and potentially overvalued.[10] On the qualitative side, a degree of rigor in institutional change in America has prompted a rotation out of USD assets—and this has shown up most clearly in the value of the dollar (which is down by roughly 8.5 percent against a trade-weighted basket since the start of 2025).[11] Investors have hedged their USD exposure at an ‘unprecedented rate.’[12]
So where has this capital gone? In equity markets, ‘ex-US’ funds have surged in popularity.[13] On a regional basis, Southern European markets have outperformed their northern counterparts[14], as investors have sought value in economies which have improved their macroeconomic fundamentals, including reining in their fiscal deficits. Beyond equity markets, Spain and Italy have also magnetised real estate inflows, as both countries have exceeded their five-year averages[15]. In fact, the European commercial real estate (CRE) basket as a whole has attracted inflows – as property valuations have largely stabilised – and have appreciated vis-à-vis a frozen market in the US[16].
Strong macroeconomic performance – coupled with robust macroprudential measures – has also ‘pulled’ capital to EMDEs. Across asset classes, EMDEs have posted handsome returns throughout 2025,[17] and may yet be supported by a weaker dollar amidst potentially deepening policy shifts in the US in 2026. Looking forward, the path for smart diversification should include deepening exposure to private markets and alternative assets, across geographies.[18] While calls for ‘ex’-US funds start to deepen and widen beyond liquid markets, investors will have the opportunity to capitalise upon real estate, infrastructure, private equity, and credit assets in ‘RoW’ or ‘rest of world’ which continues to post gains amidst macroeconomic resilience[19] as well as potential windfalls from deepening trade regionalism.
With the sensationalism surrounding GenAI and the digitisation of economies, data privacy has been of chief concern for banks operating across multiple jurisdictions (or indeed, in specific states in the US). However, one consequence of recent policy shifts is an increasing need for the privatisation of data. Well before the government shutdown in the US—which inhibited the release of key macroeconomic data from US statistics agencies and left investors ‘flying blind’[20]—patchy survey data since the pandemic has also hampered the gathering of key statistics in other countries including the UK.[21]
While investment houses and companies have long harvested their own microeconomic data to guide and inform decisionmaking[22]—such as freight data and domestic air passenger traffic—institutions may need to increasingly build out or strengthen in-house capacities to gather and process key macroeconomic data. Talent will be a key factor in underpinning the privatisation of data: whilst the use of AI may support research and analysis, ultimately judgement, experience and rigor of data governance will be critical in accuracy, relevance, and the ability to deploy this data to in-house decision-making.
The need to bolster efforts in the harvesting of alternative data sets extends beyond macroeconomic indicators like payroll and producer price input inflation. In private markets and at the asset level, the recent denouement of Energy Star ratings may leave real estate investors in the dark on analytics related to the energy efficiency of buildings.[23] Energy efficiency—often dubbed the ‘fifth fuel’—and keeping track of it may become increasingly important for operational performance amid surging energy demand and grid constraints in the US. If private markets are to be one of the mechanisms for strong portfolio diversification, assessing performance at the asset level with bespoke analytics will be critical for asset management and operations.
The third theme emanating from recent policy shifts is the localisation of capital. Harking back to the early days of trade tensions in President Trump’s first term, and ricocheting throughout the pandemic years, the return of industrial policy has presented banks with both opportunities as well as new operating challenges across jurisdictions. By equating economic security with national security, and in beckoning large-scale investments into critical industries, US policymakers echo their counterparts in China. Meanwhile, in Europe, the retrenchment of the US from its erstwhile security guarantees in the NATO area has spurred a salvo of investment in aerospace and defence, and investment banking deals to go along with it.
Looking beyond geopolitical reasons, macroeconomic forces—such as aging demographics and rising levels of public debt—have prompted some European policymakers to explore new levers for funding pension schemes, potentially incentivising life insurers to invest in Euro-denominated assets. A pullback of such institutions from investing in US infrastructure assets is underway,[24] and a repatriation of capital to the euro area might well accelerate in the wake of potential changes to the EU Solvency II rules—and efforts to stimulate the Savings and Investment Union.
The localisation of capital has spurred innovative financing structures to attract private sector capital into infrastructure assets[25]—which has typically been ‘crowded out’ by public funding. However, localisation does not always augur a full retrenchment of capital within national borders: top brass strategic investors, with patience, experience, risk appetite, and knowledge capital may be inherently cross-border, and thus may not always emanate from one’s own country.
As CEOs and their management teams convene to scan the horizon for 2026, and for the medium term, three key themes related to policy shifts in the US can act as guiding mechanisms for decision-making. Firstly, for quantitative and qualitative reasons, flows of both ‘fickle’ (liquid) as well as ‘sticky’ (illiquid) are being pushed from the US and pulled toward other geographies. A cascade of policy shifts have thus far shown up in ‘unprecedented’ currency hedging against USD-denominated assets. While pockets of Europe and EMDEs have magnetised inflows, private markets and alternative assets promise a path of smart portfolio diversification and rebalancing. Second, Obtaining and maintaining one’s own harvest of private data—on both the macroeconomic landscape as well as at the asset level—will be crucial for maintaining operational and portfolio performance excellence over the longer term.
Finally, it remains to be seen whether directing capital toward the most stringent calls for localisation will generate significant returns over the long term, or whether some of these investments might be considered as marketing costs or hence overhead expenses. In the realm of infrastructure assets, for example, a degree of incentivisation may support deeper capital positions and risk-sharing, but ultimately, market forces dictate competitiveness and sustainable profitability.
Alexis Crow is Partner and Chief Economist of PwC US; and Visiting Senior Fellow at ORF.
All views expressed in this publication are solely those of the author, and do not represent the Observer Research Foundation, either in its entirety or its officials and personnel.
[1] Trading View, “U.S. Dollar Index,” https://www.tradingview.com/symbols/TVC-DXY/?timeframe=YTD
[2] S&P Global, “Cryptocurrency Is Growing Within U.S. State Reserves And Statewide Pension Plans,” March 27, 2025, https://www.spglobal.com/ratings/en/regulatory/article/cryptocurrency-is-growing-within-us-state-reserves-and-statewide-pension-plans-s13455336
[3] Hyun Song Shin et al., US Dollar’s Slide in April 2025: The Role of FX Hedging, Basel, Bank for International Settlements, June 2025, https://www.bis.org/publ/bisbull105.pdf
[4] PGIM, “Our Investments Shape Tomorrow Today: A Leading Global Asset Manager with $1.4 Trillion in AUM Across Public and Private Markets,” https://www.pgim.com/at/en/borrower/about-us/newsroom/press-releases/pgim-real-estate-raises-2b-final-close-global-data-center-fund
[5] Standford University, “Economy,” https://hai.stanford.edu/ai-index/2025-ai-index-report/economy
[6] See, for example, The Budget Lab, “State of U.S. Tariffs: October 17, 2025,” https://budgetlab.yale.edu/research/state-us-tariffs-october-17-2025
[7] See, for example, Warwick J. McKibbin et al., “Erosion of Fed Independence Would Slow US Economic Growth and Boost Inflation Over Time,” PIIE, September 24, 2025, https://www.piie.com/research/piie-charts/2025/erosion-fed-independence-would-slow-us-economic-growth-and-boost
[8] See, for example, Lisa Shalett, “The Risks of a Politicized Fed,” Morgan Stanley, September 10, 2025, https://www.morganstanley.com/insights/articles/trump-fed-pressure-investing-risks-2025
[9] See, for example, Amy Bainbridge and Richard Henderson, “Australia Pensions in $2.7 Trillion Industry Shift Focus From US,” Bloomberg, July 8, 2025, https://www.bloomberg.com/news/articles/2025-07-07/australia-pensions-in-2-7-trillion-industry-shift-focus-from-us
[10] See, for example, Jack Manley, “Is the U.S. Equity Market in a Bubble?,” J.P. Morgan Asset Management, March 9, 2025, https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/is-the-us-equity-market-in-a-bubble/; Michael Msika et al., “A Great Year for US Stocks? Not Compared With Rest of the World,” Bloomberg, October 11, 2025, https://www.bloomberg.com/news/articles/2025-10-11/a-great-year-for-us-stocks-not-compared-to-rest-of-the-world?srnd=homepage-americas
[11] Trading View, “U.S. Dollar Index”
[12] Ye Xie and Anya Andrianova, “Investors Cut Dollar Exposure At Record Pace, Deutsche Bank Says,” Bloomberg, September 15, 2025, https://www.bloomberg.com/news/articles/2025-09-15/investors-cut-dollar-exposure-at-record-pace-deutsche-bank-says
[13] “Investors Flock to ‘Ex-US’ Stock Funds in Drive to Diversify,” Financial Times, October 9, 2025, https://www.ft.com/content/d5d46554-f495-4c24-91c0-b55ce150a793
[14] “Southern Europe Stocks Lead Market Rally,” Financial Times, September 6, 2025, https://www.ft.com/content/b0c9cab1-f09c-48ad-9ddf-3900afb7cecd
[15] “UK Leads Cross-border Flows; Spain and Italy Outperform Five-year Averages As Office Sector Regains Top Spot in EMEA,” Colliers, September 10 2025, https://www.colliers.com/en-gr/news/20250910-global-capital-flows-h1-2025
[16] Green Street, “Home,” https://www.greenstreet.com/ ; Paul Norman et al., “Foreign Investment Takes Bigger Share of UK, French and German Real Estate But Less in US,” CoStar News, August 8, 2025, https://www.costar.com/article/1337257415/les-investissements-etrangers-representent-une-part-plus-importante-de-limmobilier-au-royaume-uni-en-france-et-en-allemagne-mais-moins-importante-aux-etats-unis
[17] “Emerging Markets are Finally Rallying,” Financial Times, September 29, 2025, https://www.ft.com/content/359c54b6-82d0-45b1-985c-5427f062fd42
[18] “Alternatives Offer Diversification Amid U.S. Policy Shifts: BMO,” Investment Executive, May 27, 2025, https://www.investmentexecutive.com/news/research-and-markets/alternatives-offer-diversification-amid-u-s-policy-shifts-bmo/
[19] International Monetary Fund, Global Economy in Flux, Prospects Remain Dim, October, 2025, https://www.imf.org/en/publications/weo/issues/2025/10/14/world-economic-outlook-october-2025
[20] Yeo Boon Ping, “CNBC Daily Open: Flying Blind in Markets and the Economy,” CNBC Daily, November 13, 2025, https://www.cnbc.com/2025/11/14/cnbc-daily-open-flying-blind-in-markets-and-the-economy.html
[21] “UK Statistics Agency to Scrap One of Main Household Surveys,” Financial Times, February 7, 2025, https://www.ft.com/content/8973afdb-df7c-4682-b104-f3d58f199978
[22] See, for example, Liz Ann Sonders and Kevin Gordon, “Alternative Candidates (s) for Data During Shutdown,” Schwab, October 13, 2025, https://www.schwab.com/learn/story/alternative-candidates-data-during-shutdown
[23]Richard Lowe, “Real Estate Owners Flock to Alternative Platform Amid Energy Star Uncertainty,” IPE Real Assets, July, 16, 2025, https://realassets.ipe.com/news/real-estate-owners-flock-to-alternative-platform-amid-energy-star-uncertainty/10131648.article
[24] Lowe, “Real Estate Owners Flock to Alternative Platform Amid Energy Star Uncertainty”; Green Street, North America H1 2025 Infrastructure and Project Finance Regional Report, 2025, https://www.greenstreet.com/north-america-h1-2025-infrastructure-and-project-finance-regional-report/
[25] Government of Canada, https://publications.gc.ca/collections/collection_2025/cib-bic/CC11-4-2024-eng.pdf
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Dr Alexis Crow is Partner and Chief Economist of PwC US. A global economist who focuses on geopolitics and long-term investing, she works with the ...
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