## The Rewards of Rebalancing ## Source details **Canonical URL:** [The Rewards of Rebalancing](https://www.imf.org/en/publications/fandd/issues/2026/09/the-rewards-of-rebalancing-sony-kapoor) ## Other formats - [Markdown version](/en/publications/fandd/issues/2026/09/the-rewards-of-rebalancing-sony-kapoor/index.md) - [Structured JSON version](/en/publications/fandd/issues/2026/09/the-rewards-of-rebalancing-sony-kapoor/index.json) - [Bundle manifest](/en/publications/fandd/issues/2026/09/the-rewards-of-rebalancing-sony-kapoor/bundle-manifest.json) ## Bibliographic details - Authors: SONY KAPOOR - Published: August 17, 2026 --- ### Overview - Global investors are experiencing an accelerating "great rebalancing" as geopolitics reshapes the global economy and capital markets. - The catalyst: concentrated risk from rising political and policy uncertainty in the United States. - Deeper drivers: fading tailwinds behind US asset outperformance; misalignment between capital concentration and global growth; stronger policies in several emerging market and developing economies; converging risk profiles for advanced and emerging market economies. ### Distorted capital map - With just 4 percent of the world’s population, the US accounts for: - about two-thirds of global stock market capitalization; - nearly 40 percent of bond markets. - The US accounts for: - only 9 percent of global growth; - 13 percent of trade; - 15 percent of global economic output on a purchasing-power-parity basis. - The Lucas paradox: global savings have flowed from younger, faster-growing economies to slowing, aging ones, inflating US asset prices and keeping capital scarce where it could diversify risk and raise productivity. ### Diminishing tailwinds - Historic US financial tailwinds now fading and likely to reverse: - Declining interest rates, lower corporate taxes, quantitative easing, a strong dollar, fiscal indulgence, and a growing share of income flowing to capital over labor previously boosted US assets. - Foreign investors tripled exposure to US equities to more than $20 trillion over the past decade. - Evidence of a turn in the strong dollar cycle; weakening dollar increases attractiveness of emerging market and developing economies. - Room for further cuts to US taxes and interest rates is limited; both are as likely to go up as down given the ballooning deficit and persistent inflation. - The Federal Reserve is moving toward quantitative tightening, reversing the era of $9 trillion in peak asset purchases. - Historic drivers of US corporate profit growth and valuations: - "Lower interest expenses and lower corporate taxes alone explain more than 40 percent of the real growth in US corporate profits between 1989 and 2019." - Lower risk-free rates explain expansion in price-earnings multiples over that period. - Rising concentration and fragility: - In the past three years, just seven companies accounted for 55 percent of total S&P 500 returns. - The top 10 companies now make up 40 percent of the index. - Gradual erosion of the traditional safe-haven status of US Treasurys. ### Capital shifts - Rebalancing begins at the margin; modest changes in large allocations have large macro impacts: - Norway’s $2.2 trillion oil fund allocates 53 percent of holdings to US assets; trimming to 40 percent would free about $250 billion for investment elsewhere. - Trillions in pension funds, insurers, and sovereign wealth funds could be redeployed: - Some capital will flow to developed economies (United Kingdom, euro area, Japan). - Emerging market and developing economies offer the most opportunity. - Emerging market and developing economies contributions and dynamics: - They have driven three-quarters of global growth in recent decades. - China and India alone accounted for nearly half of global growth last year, three times the combined contribution of the US and the European Union. - India and sub-Saharan Africa will each gain more than 12 million workers every year. - Labor productivity growth in emerging market and developing economies is about 3 percent, more than three times the average for advanced economies. ### The risk-return case - Financial markets lag economic shifts: - Emerging market and developing economies accounted for only about 11 percent of global equity market capitalization and 26 percent of bond markets at the end of 2025. - Closing this gap would be macroeconomically significant: - Reweighting could plug the annual financing gap of more than $4 trillion and lower financing costs for these economies. - High cost of capital particularly hinders climate mitigation and adaptation investments. - Convergence of risk profiles: - Public debt: advanced economies 108 percent of GDP versus emerging market and developing economies 75 percent of GDP. - Currency volatility and sovereign default rates have converged. - Several emerging economies now have lower public debt ratios, more orthodox monetary policy, stronger reserve buffers, and greater policy predictability than many developed economies, including the US. - Political risk in advanced economies (rising polarization and instability) narrows perceived safety differentials. - Conclusion: Emerging economy investments now offer robust returns, limited incremental risk at the portfolio level, and large diversification potential as US outsize returns moderate and concentration risks rise. ### Portfolio optimization - Emerging market and developing economies provide structurally different returns (demographics, currencies, politics, policy regimes, sectoral composition) and generally lower correlations with developed markets. - Modern portfolio theory implication: - Assets should be judged by contribution to whole-portfolio risk and return, not standalone expected return. - Many "global" portfolios are concentrated bets on US equities, Treasurys, the dollar, and a small group of tech companies. - Rebalancing toward emerging economies can: - Improve risk-adjusted returns for institutional investors bound by fiduciary duty. - Lower financing costs for emerging economies, boosting investment, jobs, growth, and supporting a more resilient, low-carbon economy. ### Policy implications and recommendations - Rebalancing is inevitable but timeline is uncertain due to barriers: - Weak project pipelines; - Misaligned incentives; - Perverse regulations; - Investors’ general unfamiliarity with these markets. - Top policy priorities: - Remove barriers that slow capital reallocation to emerging market and developing economies. - Strengthen project pipelines and align incentives and regulations to attract institutional capital. - Expected outcomes: - Unlock stronger, more balanced global growth; - Reward investors with higher risk-adjusted returns; - Potentially begin to address the Lucas paradox. *The Rewards of Rebalancing, SONY KAPOOR, September 2026, F&D Magazine.* --- ## Content in this bundle - **The Rewards of Rebalancing** - [The Rewards of Rebalancing (Markdown version)](/-/media/files/publications/fandd/article/2026/09/kapoor.pdf.md){rel="alternate" type="text/markdown"} - [The Rewards of Rebalancing (PDF)](/-/media/files/publications/fandd/article/2026/09/kapoor.pdf){rel="external" type="application/pdf"} - **ch1** - [ch1 (Markdown version)](/-/media/files/publications/gfsr/2025/october/english/ch1.pdf.md){rel="alternate" type="text/markdown"} - [ch1 (PDF)](/-/media/files/publications/gfsr/2025/october/english/ch1.pdf){rel="external" type="application/pdf"} - **ch2** - [ch2 (Markdown version)](/-/media/files/publications/weo/2025/october/english/ch2.pdf.md){rel="alternate" type="text/markdown"} - [ch2 (PDF)](/-/media/files/publications/weo/2025/october/english/ch2.pdf){rel="external" type="application/pdf"} - **Working Paper** - [Working Paper (Markdown version)](/-/media/files/publications/wp/2025/english/wpiea2025256-source-pdf.pdf.md){rel="alternate" type="text/markdown"} - [Working Paper (PDF)](/-/media/files/publications/wp/2025/english/wpiea2025256-source-pdf.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2026/09/the-rewards-of-rebalancing-sony-kapoor_