Executive Summary
Goldman Sachs International Co-CEO Kunal Shah identifies a structural shift in global capital allocation that could reshape regional equity performance. Asian and European countries are transitioning from excess savers recycling capital into US assets to domestic-focused investors due to geopolitical concerns, defense spending requirements, and reserve manager scrutiny. This represents a fundamental change from the post-GFC playbook. Shah notes that reserve managers are being watched more closely and are reducing US Treasury and dollar allocations, while countries previously running fiscal surpluses are now loosening constraints for domestic defense expansion. The US maintains momentum through AI-driven CapEx, Fed cuts, and deregulation tailwinds, but Goldman's prime brokerage data shows concerning consensus signals: five-year highs in gross leverage, elevated short VIX positioning, and risk appetite indicators approaching yearly peaks. European pessimism creates a low performance bar, with German industrial orders showing domestic defense spending acceleration. Chinese export-driven growth post-3rd plenum threatens European competitiveness but supports continued Chinese asset rallies despite recent margin financing ratio adjustments. Shah's framework suggests the 'don't fight the fundamentals' era may be reaching maturity as technical and sentiment indicators flash caution signals.
Key Insights
what Kunal Shah said“We have to remember that for years you had excess savers in the other time zones, recycling and buying US assets and some of those things have just structurally changed... the natural drift is going to be for more capital to be invested domestically and just less of that circulation going to the US”
what Kunal Shah said“If we look at our own prime data, look, you're starting to hit high levels of gross leverage, you know, five years highs now with recent flows, you know, quite a lot of short vix positioning out there, risk appetite indicators that we track, and our approaching, you know, highs for the year”
what Kunal Shah said“If you look at the recent data that German industrial orders showed that some of that defense spending is really starting to happen and it's more domestically geared than some may have thought”
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