Investors are pulling back from US stocks, according to BNY economists. In 2025, US portfolio weightings dropped from 68% to just over 64%. Europe had its best performance in late Q1 and early Q2. This improvement was due to moving away from the dollar after the ‘Liberation Day’ tariffs. European investments rose to over 11% of portfolios, but they have since decreased. Nonetheless, they remain higher than at the start of the year, indicating ongoing support for reinvesting in Europe.

Emerging Markets and FX Gains

While US and Eurozone markets finished the year lower, emerging markets gained strength. This trend is likely to continue into 2026. Although investments in these markets are lighter, it doesn’t mean a significant cut in investments in developed markets. However, FX gains might be limited because yield differences favor higher hedge ratios, and pressures on export competitiveness could limit appreciation. As large investors cut their US equity exposure from 68% to 64% of their portfolios, it might be wise to consider downside protection. Buying put options on the S&P 500 or Nasdaq 100 indices for February 2026 could help guard against a drop early in the year. This cautious approach is backed by the recent preliminary US Q4 GDP figures, which showed a growth of 1.9%, falling short of the 2.2% expected and raising concerns about a slowdown. This uncertainty is visible in the derivatives market, where the VIX rose to 17.5 after spending much of Q4 below 15. For traders who think the market may stay flat or decline, selling out-of-the-money call spreads on major US indices could be a good strategy for generating income. This aligns with the trend of investors using recent market strength as a chance to sell, as evidenced by $15 billion in net outflows from US stock ETFs this month. In Europe, where holdings have softened from Q2 highs, the initial excitement from the post-Liberation Day tariff shifts appears to be stabilizing. Although confidence has waned, holdings still sit above early 2025 levels, indicating a neutral stance rather than a bearish one. Implementing collar strategies—buying a protective put and selling a call against a long position—on European indices could help secure some of this year’s gains while sacrificing some upside.

Emerging Markets Opportunities

The shift toward emerging markets offers a strong opportunity in the coming weeks, similar to the 2003-2007 period when a weaker dollar spurred a multi-year rally in these markets. With positioning still light, there’s room for ongoing momentum into early 2026. This perspective is supported by robust Manufacturing PMI data from countries like India, which recently recorded a figure of 58.5, while the US ISM index has struggled to stay above 50. We suggest considering long positions through call options on broad emerging market ETFs to take advantage of potential upside with controlled risk. Addressing currency risk is crucial, as yield differences still favor the dollar. Traders might want to hedge their currency exposure by shorting emerging market currency futures against their long equity positions to isolate their focus on stock performance. Create your live VT Markets account and start trading now.

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