MXAPJ falls 2% as foreign outflows, weaker Asian FX, and Fed repricing dominate market sentiment

Overview

This is a Goldman Sachs Asia-Pacific portfolio strategy weekly report, focusing on MXAPJ and broader Asian market performance under pressure from foreign outflows, weaker Asian FX, stronger-than-expected US inflation, delayed Fed easing expectations, a rebound in oil prices, and a post-US-China meeting 'sell-the-fact' reaction. The report also covers potential passive flows from MSCI index rebalancing, spillover from expanding AI investment into Asian tech exports, progress in the CY1Q26 earnings season, regional market and sector performance, fund flows, risk indicators, and macro tracking.

Core views

The near-term market view is cautious: MXAPJ fell 2%, with flow pressure concentrated in South Korea and Taiwan, while macro conditions were affected by stronger-than-expected US PPI and CPI, solid retail sales, and slightly higher-than-consensus jobless claims, pushing rate-cut expectations back to December and March next year. Although the US-China meeting discussed trade, oil, Iran, and Taiwan, no major breakthrough or concrete outcome was announced, leaving risk appetite under pressure afterward. Structurally, AI server investment and global data-center capex continue to support Asian tech exports; Taiwan, already the most tech-oriented economy before the AI wave, is expected to see export resilience partly offset the pressure on its current account from higher energy prices.

Analysis framework

The report combines regional index performance, sector and style performance, EPFR and exchange-based foreign flow data, MSCI rebalancing forecasts, macro data tracking, policy risk indicators, earnings-season statistics, and chart-based cross-asset observations. Its focus is not single-company fundamental valuation, but rather identifying, from a portfolio strategy perspective, the impact of capital flows, index passive adjustments, macro shocks, and thematic spillovers on Asia-Pacific assets.

Methodology notes

• Index and passive flowsMSCI Global Investable Market Indexes Index Review

  Index rebalancing flow estimation

  Based on MSCI core index changes, free-float factors, prices, fund assets, and passive tracking assumptions, the report estimates possible gross two-way flows, net passive inflows or outflows, and stock-level relative trading impacts across Asia-Pacific and GEM markets.

• Fund flows and liquidityEPFR and foreign flow tracking

  Monitoring net foreign buying/selling

  Regional foreign flow and fund flow data are used to gauge changes in risk appetite. The most notable signal this week was US$17bn of foreign selling in emerging Asia ex-China, concentrated in South Korea and Taiwan.

• Thematic researchAI investment spillover analysis

  Linking AI server revenue and Asian tech exports

  The report connects global data-center investment, AI server revenue growth, and Asian tech export growth, examining the degree to which economies such as Taiwan, South Korea, Singapore, Hong Kong, and Malaysia benefit.

• Earnings-season trackingCY1Q26 Earnings Reporting Season Monitor

  Earnings reporting progress and surprise rates

  By tracking the number of companies reported, market-cap coverage, beat rate, miss rate, and median earnings surprise, the report gauges MXAPJ earnings delivery and the market's reaction to results.

• Risk monitoringGS Asia Pacific ex-Japan Equity Risk Barometer and US-China Relations Barometer

  Equity risk and policy risk indicators

  The report tracks Asia-Pacific ex-Japan equity risk, volatility, correlations, and US-China relations risk indicators to help assess the market risk premium and policy uncertainty.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MXAPJ

  Core regional equity index

  Strengths

  CY1Q26 earnings reports show 49% of companies beating expectations, and AI-related exports plus technology hardware/semiconductor themes provide structural support.

  Weaknesses

  The index fell 2% for the week, pressured by foreign outflows, weaker Asian FX, and hawkish Fed repricing.

  Comparison

  Singapore, Thailand, and South Korea outperformed, while Indonesia, offshore China, and India were weaker.

  Risks

  US inflation continuing to run hot, further delayed rate cuts, continued foreign outflows, higher oil prices, and policy uncertainty between the US and China.

• South Korea market

  One of the Asia-Pacific markets with the largest foreign outflows, while also expected to receive MSCI passive net inflows

  Strengths

  South Korea rose 1% for the week, outperforming MXAPJ; MSCI rebalancing is expected to bring about US$2.0bn in net passive inflows.

  Weaknesses

  Foreign investors sold US$13.2bn this week, the main driver of regional outflows.

  Comparison

  Compared with Taiwan, South Korea saw larger active foreign outflows; compared with Indonesia and India, its price performance was stronger.

  Risks

  Ongoing foreign selling, technology-cycle volatility, and weakness in the won and other Asian currencies.

• Taiwan market

  An AI- and tech-export beneficiary market, also affected by MSCI rebalancing

  Strengths

  AI investment spillover supports tech exports, MSCI rebalancing is expected to generate about US$2.4bn of net passive inflows, and Taiwan was already one of the most tech-oriented economies before the AI wave.

  Weaknesses

  There was still about US$2.5bn of foreign outflows this week.

  Comparison

  Compared with other Asian economies, Taiwan has a higher share of tech exports and value added from the technology sector.

  Risks

  A slowdown in global AI capex, a semiconductor cycle downturn, reversal of foreign flows, and geopolitical risk.

• Asia-Pacific technology hardware and semiconductors

  The main beneficiary sector of AI server investment spillover

  Strengths

  Goldman Sachs expects 2026 server revenue of about US$650bn, and Asian tech exports have risen sharply over the past two years.

  Weaknesses

  Valuations and earnings are sensitive to the durability of AI capex.

  Comparison

  Among sector performances, technology hardware and semiconductors are highlighted as relative leaders, while software, capital goods, and healthcare lagged.

  Risks

  AI demand falling short of expectations, supply-chain bottlenecks, export restrictions, and higher US dollar rates compressing valuations.

• Crude oil and energy prices

  A macro cost and inflation transmission factor

  Strengths

  The rebound in oil prices may support energy-related assets and nominal revenues.

  Weaknesses

  Higher energy prices could weigh on current accounts and corporate margins in Asian import economies.

  Comparison

  The report suggests that export strength in some economies may offset part of the current-account pressure from higher energy prices.

  Risks

  Further oil price increases, higher fuel prices in India, renewed inflation pressure, and delayed rate cuts.

• MSCI rebalancing-related passive flows

  A source of short-term technical market flows

  Strengths

  Australia, Taiwan, and South Korea are expected to receive the largest net passive inflows in Asia-Pacific.

  Weaknesses

  Japan, Indonesia, and India are expected to face the largest net passive outflows.

  Comparison

  Passive flows may move in a different direction from active foreign flows; for example, South Korea and Taiwan saw active foreign outflows this week but are expected to receive net inflows from rebalancing.

  Risks

  Crowded trading, insufficient liquidity, deviations in tracking-fund size assumptions, and execution-price impact during rebalancing.

Key data

• MXAPJ weekly performance-2%The report says MXAPJ fell 2% for the week, with Singapore, Thailand, and South Korea outperforming, while Indonesia, offshore China, and India underperformed.
• Emerging Asia ex-China foreign flow-US$17bnWeekly foreign selling was led by South Korea and Taiwan, marking the second-largest weekly outflow on record.
• South Korea foreign flow-US$13.2bnSouth Korea was the largest source of regional foreign outflows this week.
• Taiwan foreign flow-US$2.5bnTaiwan also saw notable foreign selling, though MSCI rebalancing is expected to bring passive net inflows.
• MSCI Asia-Pacific/GEM rebalancing gross two-way flowsmore than US$76bn/US$44bnExpected to take effect after the close on 2026-05-29, with net inflows in Asia concentrated in Australia, Taiwan, and South Korea, and net outflows concentrated in Japan, Indonesia, and India.
• Expected net passive inflow to Australia+US$2.6bnExpected to be the largest net passive inflow in Asia-Pacific markets.
• Expected net passive inflow to Taiwan+US$2.4bnExpected to receive significant passive net inflows from MSCI rebalancing.
• Expected net passive inflow to South Korea+US$2.0bnContrasts with the week's active foreign selling.
• Expected net passive outflow from Japan-US$1.9bnExpected to be one of the main net outflow markets in Asia-Pacific.
• 2026 server revenue outlookabout US$650bnGoldman Sachs' technology team expects server revenue growth to be driven by AI demand.
• MXAPJ earnings reporting coverage76% of market capAs of the report date, 821 companies had reported CY1Q26 earnings.
• CY1Q26 beat/miss rate49%/27%The report gives a median earnings surprise of +5%.

Impact & implications

For investors, the report suggests that near-term risk appetite in Asia-Pacific equities is being constrained by fund flows and macro repricing, especially in markets with high foreign participation such as South Korea and Taiwan, and by the transmission from US inflation and Fed expectations into FX, rates, and valuations. Structural themes remain intact, however: AI server revenue and data-center investment are supporting Asian tech exports, which may benefit industries linked to Taiwan, South Korea, Singapore, Hong Kong, and Malaysia; MSCI rebalancing may also create short-term passive flow shocks in selected markets and individual stocks.

Risks

• Stronger-than-expected US PPI and CPI may push rate-cut expectations further back, which could weigh on Asia-Pacific equity valuations and fund flows.
• Continued large foreign outflows from emerging Asia ex-China, especially South Korea and Taiwan, could amplify market volatility.
• Broad weakness in Asian FX may affect USD-based returns and import costs.
• The rebound in oil prices and higher fuel prices in India may intensify inflation and current-account pressure.
• The Trump-Xi meeting did not deliver a major breakthrough or concrete outcome, and uncertainty around US-China relations and trade policy could still unsettle markets.
• If AI server and data-center investment falls short of expectations, support for Asian tech exports and the technology hardware/semiconductor sector could weaken.
• MSCI rebalancing-related passive flows may create short-term liquidity shocks at both stock and market level.

What to watch

• The actual execution and flow impact of the MSCI index rebalancing after the close on 2026-05-29.
• The first FOMC meeting after Kevin Warsh becomes Fed chair on 2026-06-16 to 2026-06-17 and the wording on the rate path.
• Whether US inflation, retail sales, employment, and jobless claims continue to support hawkish repricing.
• Whether foreign flows into South Korea, Taiwan, and other emerging Asian markets stabilize.
• Trends in Asian FX and their impact on USD-based returns and local financial conditions.
• China exports, the trade surplus, CPI, PPI, and the easing pace in PBOC policy reports.
• Whether AI server revenue, data-center investment, and Asian tech exports can maintain their strength.
• The subsequent beat rate, earnings revisions, and share-price reactions of companies reporting after the CY1Q26 earnings season.