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US buying warning

Foreign buying of US equities has hit an all-time high and could be a negative indicator for the FTSE All-Share index

Foreign buying of US equities has hit an all-time high. US Treasury figures show that they bought $41.9bn of stocks in May.

History suggests such buying leads to falling share prices in the UK. Since 1992, the correlation between foreign buying of US stocks and subsequent annual returns on the FTSE All-Share has been -0.52. If this relationship continues to hold, the All-Share will drop 20 per cent in the next 12 months.

This is because big foreign buying is usually a sign of irrational exuberance.

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