On the financial side, a combination of geopolitical and economic factors is also increasing investor uncertainty and diminished confidence in US dollar assets. As a consequence, a vigorous search for safe havens is causing big shifts in portfolio capital flows with major impacts on the US dollar, gold and other asset prices.
If anything, developments in just the first month of this year show that the forces of change are intensifying: the adjustments that countries and companies have to make in response are therefore accelerating.
All this raises the key question — what’s in it for us in Southeast Asia as a result?
Political factors are increasingly important in driving capital allocation
See also: When Hong Kong investors start to take notice of Singapore
Politically-driven supply chain reconfiguration is emerging as a major factor determining foreign direct investment (FDI), as firms de-risk from the trade wars and geopolitical risks. In several sectors, both Chinese and foreign producers are shifting out of China in order to avoid tariffs and other restrictions aimed at China. The preliminary FDI data from UNCTAD shows the results of these shifts:
- China is losing out in terms of incremental flows of new FDI, which fell by 8% to around US$107.5 billion ($135 billion) last year — the third consecutive year of falling FDI. But not everything is falling for China — new FDI is still flowing into China in strategic and high-growth sectors.
- Asean continues to be a winner. For instance, despite its political instability, the value of new greenfield projects doubled to US$19 billion in Thailand. Chinese manufacturing companies seem comfortable with Southeast Asia — favouring Vietnam, Thailand and Malaysia in particular. Also note how Micron has committed a stunning US$24 billion in new investments in Singapore.
- Still, our region cannot be complacent. Latin America is now drawing a large inflow of FDI, for diverse reasons. Those firms interested primarily in serving the US market favour Mexico, which is why FDI inflows to Mexico increased by 16% to US$44 billion. The FDI is concentrated in export-oriented manufacturing plants, enabling Mexico to grow in importance as a manufacturing hub. FDI inflows to Brazil also rose by 42% to an estimated $89 billion, the second-highest level on record, supported by strong investment in renewable energy and green technologies. In Guyana, FDI flows reached $12 billion — a 42% increase — driven by large-scale investment in offshore oil and gas.
Looking ahead, the impact of political factors on FDI decisions will grow further. The US has pressed its trading partners to commit large investments in the US as part of trade deals. Japan agreed to commit investment worth US$550 billion to secure lower tariffs on Japanese exports into the US. South Korea agreed to a US$350 billion commitment, while Taiwan offered US$250 billion, and the European Union (EU) is down for US$600 billion.
See also: Tariff volatility may determine market dynamics and investment trends
While not all of this will actually be spent, and a lot of it represents FDI that would have happened anyway, there is still a material shift in capital flows that favours the US:
- The US has also made it clear that swingeing new tariffs will be imposed in key sectors such as semiconductors and pharmaceuticals unless producing firms commit to building new production facilities in the US. That will divert FDI away from this region, which could hurt Singapore, which has a sizeable exposure to those sectors.
- As the US steps up its hardball tactics in trade and other areas, there is a rush to diversify away from dependence on the US and create new trade and strategic alliances that can help countries stand up to the US. This is why India and the EU finally concluded negotiations for a free trade area after many years of wrangling. The same pattern was evident in the EU’s trade deal with Mercosur, a group of Latin American economies. This is also why Canada has overcome recent strains in relations with China and India and set ties on a new footing. British Prime Minister Keir Starmer is also visiting China, hoping to reset ties after a period of awkwardness. These alliances will produce new flows of trade and investment — away from the US.
- The need to de-risk supply chains is also evident in how US companies are reducing reliance on Chinese producers in strategically important areas. This explains why, for example, American battery companies are moving manufacturing away from China to South Korea. SES AI and Amprius Technologies are reported to be expanding battery cell manufacturing capacity in South Korea, even though the costs of producing in South Korea are roughly double that in China.
- Another example of strategically driven capital flows is China’s spending on the Belt and Road Initiative (BRI), which increased by three-quarters to a record US$213.5 billion in 2025. This helps China win friends in the face of a hostile America. But China is also focused on securing access to key energy and commodity resources to better position itself in its contest with the US. Gas megaprojects and green power dominated much of China’s BRI spending last year.
Other factors are compounding this shift
Technology emerged as a major driver of FDI flows in 2025. UNCTAD data show that data centres accounted for more than one-fifth of global greenfield project values in 2025.
The value of newly announced projects exceeded US$270 billion. Much of this went into AI infrastructure and proprietary digital networks. Separately, the value of newly announced semiconductor projects rose by 35%.
Similarly, shifting views of energy transition are also playing a role in capital flows. According to UNCTAD, the number of international infrastructure projects fell by 10%, largely due to a sharp pullback in renewable energy as investors reassessed revenue risks and regulatory uncertainty.
Portfolio capital flows are also reorienting
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The other major development has been in portfolio capital flows rather than FDI. This became dramatically evident in the past few days with the large fall in the US dollar, while safe haven assets such as gold, the Swiss franc and the Singapore dollar have surged in value.
In essence, a clear trend towards selling US assets gathered momentum after US President Donald Trump’s speech in Davos, even after he backed off his threats to take over Greenland and to impose swingeing tariffs on Europe. Investors are basically pricing in an America that is now a destabilising force in global politics, economy and finance.
Since Trump took office again in January last year, the old relationship between investors’ risk aversion and US bond yields has changed. Where before, capital poured into USD assets during periods of great uncertainty and drove down bond yields, the opposite relationship is now evident. And, where before, global investors selling US bonds would remain in some other US dollar-denominated assets, this is less the case now. That is why the fall in bond yields was also accompanied by a weakening of the US dollar. Investors see the US itself as a source of risk and are looking for other safe haven assets, limited though they are in supply.
Such risk-driven reallocation of portfolio capital has been building up for some months now. For example, European institutions have been increasingly pushing into private markets to help mitigate what BlackRock described as “a new regime of higher volatility”.
This shift out of the US dollar could gather pace in the months ahead if confidence in the US continues to erode. There are a number of factors to watch out for. The most important is the political situation in the US. If the protests against Trump’s harsh crackdown on illegal immigration spread and there is great dissension in the US, that would worry investors. So too, if the polling begins to show a precipitous fall in Trump’s popularity, a huge electoral setback is likely at the mid-term elections in November. Already, the Democrats in Congress are vowing to block budget bills and provoke a government shutdown unless Trump and his Republican allies make concessions on the immigration issue.
If the domestic situation in the US worsens, investors will start looking at factors that they have tended to underplay, such as the unsustainable fiscal trajectory the country is on. The current fall in the dollar could then turn into an outright rout.
Still, there are fundamental limits to how much money global investors can actually move out of the US dollar — and that should help contain the fall of the US dollar. The American currency is still the only global currency that can perform key functions for the world economy. US dollars accounted for a massive 50.5% share of international transactions in December, up from 46.8% in November, according to Swift, the first time the share exceeded 50% since 2023.
The other currencies pale beside the dollar — the euro had a 21.9% share, with the British pound, Canadian dollar, Japanese yen and Chinese yuan well behind. Far from growing its share, the yuan’s share in international transactions fell to 2.7%, below the currency’s average over the last year.
China may ironically come to the aid of the US dollar. Its external surpluses are expanding hugely. That gusher of cash has to go somewhere — and since the alternatives to the US dollar are so limited, the money will find its way eventually into the US dollar.
While China’s official holdings of US dollar assets may not have grown in recent years, the non-official sector in China has seen its holdings of assets abroad soar by more than US$1 trillion in the first three quarters of last year, more than double the annual average growth in the past decade.
What does this mean for our region?
In short, the patterns of FDI flows are increasingly reflecting geopolitical factors, something which could benefit Southeast Asia. Rapid developments in new technologies and the need for energy resources are also contributing to a shift in FDI flows.
Separately, there is also a fundamental recalibration of the perception of risk of holding US dollar assets, which is leading to a weaker US dollar and a keen search for safe haven assets on the part of global investors — although there is a limit to how much the US dollar could fall.
There will be sizeable implications for our region. First, a period of US dollar depreciation tends to be supportive of growth in emerging economies as it enables easier financial conditions.
Second, there is increased risk aversion among global investors. Small changes in perception of risks in our region can produce disproportionate changes in asset values.
Note the sharp fall in Indonesian equities this week — all because MSCI warned that problems with transparency in Indonesian financial markets may make Indonesia less investable and potentially downgraded from an emerging market to a frontier market. With investors primed to take fright at negative developments, there is clearly little room for careless monetary or fiscal policy decisions either.
Third, the search for safe haven assets will expand. Singapore dollar assets look enticing, but there are not enough of them. Some funds are shifting money into emerging markets, which they find undervalued.
We might therefore see funds flowing into the next best alternatives. Malaysia could be a beneficiary — global investors’ perceptions of Malaysia have improved significantly in the past year.
Manu Bhaskaran is the CEO of Centennial Asia Advisors
