Report Interpretation

Overview

This Asia-Pacific weekly strategy update reviews regional equity performance, macro policy, positioning, earnings, valuations and upcoming catalysts. Goldman Sachs sees a constructive medium-term path for MXAPJ despite near-term foreign outflows and tighter global monetary conditions, provided growth and earnings remain resilient.

Core views

MXAPJ fell 0.4% during the week as foreign outflows and weaker Asian currencies weighed on the region. Taiwan outperformed with a 2% gain, while Korea, China and Hong Kong were broadly flat; the Philippines declined 5% and other ASEAN markets fell 1% to 2%. Health Care, Tech Hardware & Semiconductors, and Consumer Retail led sector performance, whereas Capital Goods, Energy and Internet/Media lagged. EM Asia ex-China experienced US$7.4bn of weekly foreign outflows, principally Korea's US$6.5bn outflow. Oil prices declined as concerns over possible Saudi supply disruption eased. The monetary backdrop turned more restrictive. The FOMC delivered an expected 25bp hike and its dot plot pointed to one additional 25bp increase by year-end. Goldman Sachs' US economists expect another hike in October, then a pause through the first half of 2027, followed by rate cuts in September and December 2027; this is less hawkish than consensus expectations for two further hikes in the first half of 2027. The BOJ also raised rates by 25bp and signaled further tightening, while Taiwan's central bank left rates unchanged. The report argues that Asian equities have historically weakened after a first Fed hike, particularly North Asian markets in recent tightening cycles, but can generally absorb additional tightening when economic growth and earnings delivery remain sound. A sharp rise in yields—illustrated as moves more than 1.5 standard deviations above historical norms—would be more damaging to liquidity and market performance. Goldman Sachs links the regional outlook to growth conditions. Strong US core retail sales exceeded expectations. In China, industrial production beat expectations on resilient exports and stronger output growth, but fixed-asset investment, retail sales and credit growth disappointed, preserving the divergence between strong supply and weak demand. Together with softer labour-market conditions, this led Goldman Sachs economists to reduce their 2026 China real GDP forecast by 0.1 percentage point to 4.5% year-on-year. India’s trade deficit narrowed as oil and gold imports declined, while headline CPI reached a 22-month high. A major thematic focus is India’s AI-enabler cohort. Goldman Sachs describes 42 companies spanning power, data centres and semiconductors that have risen about 60% year-to-date despite the Nifty falling 12%. The report attributes this divergence primarily to earnings growth rather than valuation multiple expansion. The cohort has a combined listed market capitalisation of about US$670bn, led by data-centre operators followed by power equipment, power generation and power transmission companies. All three layers—power, data centres and semiconductors—have returned roughly 40% to 80% year-to-date. Goldman Sachs expects robust profit growth over the next two to three years and notes that earnings upgrades are concentrated in data-centre hardware, followed by power equipment, semiconductor materials and power transmission. Although the group trades at a substantial premium to MSCI India, its PEG ratio is slightly lower than the index after adjusting for its stronger profit-growth outlook. Positioning presents a mixed near-term signal. Mutual funds increased exposure to India and China in August while reducing Taiwan and Korea. Preliminary EPFR data show Asian funds most overweight China, Hong Kong and Singapore and most underweight Taiwan and India; EM funds are most overweight Brazil and Mexico and most underweight Taiwan. Hedge funds were net buyers of China and Hong Kong in September but net sellers of Korea, Taiwan and Japan. Aggregate hedge-fund exposure to Asian equities remained overweight by 13% relative to MSCI AC World, below the June record of 20% but above 6.5% at the start of the year. Korea leveraged ETF assets recovered from a US$16bn trough to US$22bn, although the increase was mainly market-return driven and accompanied by moderate outflows since late July. Taiwan leveraged ETF assets remained near a record US$12bn, with profit-taking outflows since August. The strategy scorecard retains an overweight stance on Korea and Taiwan, market-weight stances on China, Hong Kong and India, and an underweight stance on Australia, Indonesia, the Philippines and Thailand. Goldman Sachs' 12-month index targets imply 74% price appreciation for Korea, 22% for China A shares, 14% for Taiwan, 16% for MSCI China and 13% for India. For MXAPJ, Goldman Sachs sets a 12-month target of 1,120 from 880, implying 27% price appreciation and 30% total return. At sector level, the report is overweight Capital Goods, Health Care, Tech Hardware & Semiconductors, Banks and selected ex-Australia/ex-China Banks; it is underweight Autos, Consumer Staples, Software & Services, Transportation, Utilities, Property, Retail & Durables and Telecom Services. Earnings and valuation data support the constructive stance but also show uneven underlying conditions. The earnings-revision leading indicator signals sustained upgrades at a moderating pace. Goldman Sachs forecasts MXAPJ local-currency EPS growth of 73% in 2026 and 25% in 2027, with particularly high expected 2026 growth in Korea at 338% and Taiwan at 65%. MXAPJ trades on 10.5x forward 12-month P/E, 9.1x forward 24-month P/E and 2.4x trailing P/B; its average valuation z-score is negative relative to the prior ten years. Tech Hardware & Semiconductors trade at 8.5x forward 12-month P/E and 7.2x forward 24-month P/E, while their expected earnings growth remains strong. The report also notes that its Regional Asia Drawdown Risk model indicates materially reduced drawdown risk following the recent sharp market correction.

Analysis framework

Goldman Sachs combines weekly market returns, sector performance and foreign-flow data with central-bank developments, macro releases, earnings revisions, consensus forecasts, valuation comparisons and institutional positioning. It assesses the effects of higher real rates through historical Asian-equity returns following Fed tightening, then frames regional allocations using expected earnings, valuation, flow and macro conditions.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Forward P/E and PEG comparison

  The report compares forward earnings multiples and adjusts valuation assessment for expected profit growth. This supports its view that Indian AI Enablers, despite trading at a premium to MSCI India, have a slightly lower PEG ratio.

• Valuation methodsPB valuation

  Price-to-book valuation versus historical ranges

  The report compares trailing P/B and 10-year valuation z-scores across Asian markets and sectors to place current equity valuations in historical context.

• Event-Driven and Behavioral FinanceExpectation Gap and Expectation Management

  Earnings revisions and economic data versus expectations

  The report uses changes in consensus EPS estimates and macro data surprises to identify where earnings momentum or economic conditions are improving or deteriorating.

Asset mapping & comparison

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

• MXAPJ

  Primary regional equity benchmark and strategy subject

  Strengths

  Expected earnings growth, below-average historical valuation metrics and a 12-month target of 1,120.

  Weaknesses

  Weekly decline amid foreign outflows and weaker Asian currencies.

  Comparison

  Goldman Sachs forecasts 27% price appreciation from 880, compared with varying target returns across individual regional markets.

  Risks

  Sharp rises in US real yields, weaker growth and sustained foreign outflows could impair performance.

• India AI Enablers

  Thematic growth cohort

  Strengths

  Approximately 60% year-to-date performance driven by earnings growth, strong upgrades and expected robust profit growth over the next two to three years.

  Weaknesses

  Trades at a wide premium to the MSCI India index.

  Comparison

  The cohort outperformed sharply while the Nifty fell 12% year-to-date; its PEG is slightly lower than MSCI India after adjusting for growth.

  Risks

  The report does not specify an asset-specific risk.

• Korea

  Overweight Asia market allocation

  Strengths

  Goldman Sachs' 12-month KOSPI target of 12,000 versus 6,894 implies 74% price appreciation.

  Weaknesses

  Was the principal source of EM Asia ex-China weekly outflows at US$6.5bn and was a hedge-fund net-sell market in September.

  Comparison

  The report assigns Korea a larger implied target gain than other regional markets listed in the allocation table.

  Risks

  Historically among the North Asian markets most vulnerable following Fed tightening cycles.

• Taiwan

  Overweight Asia market allocation

  Strengths

  Gained 2% during the week; Goldman Sachs' 12-month TWSE target of 54,000 versus 47,181 implies 14% price appreciation.

  Weaknesses

  Mutual funds and hedge funds reduced exposure, while leveraged ETF investors have taken profits since August.

  Comparison

  Taiwan technology hardware and semiconductors are a major regional earnings-growth engine but are among the most underweight areas in fund positioning.

  Risks

  Historically among North Asian markets that have underperformed during recent Fed tightening cycles.

Key data

• MXAPJ weekly return-0.4%Taiwan gained 2%; the Philippines fell 5%.
• EM Asia ex-China foreign flows-US$7.4bnWeekly outflow, driven primarily by Korea at -US$6.5bn.
• MXAPJ current level and 12-month target880 / 1,120Implies 27% price appreciation and 30% total return.
• India AI Enablers performance~60% YTD42-company cohort versus Nifty down 12% year-to-date.
• India AI Enablers market capitalisation~US$670bnLargely led by data-centre operators, followed by power-related businesses.
• China 2026 real GDP forecast4.5% YoYReduced by 0.1 percentage point amid softer labour conditions and weak demand indicators.
• MXAPJ earnings growth forecast73% for 2026E; 25% for 2027EGoldman Sachs top-down local-currency EPS forecast.
• MXAPJ valuation10.5x forward 12-month P/E; 9.1x forward 24-month P/E; 2.4x trailing P/BAverage valuation z-score is below its 10-year historical average.

Impact & implications

The report’s constructive MXAPJ target rests on resilient growth, substantial expected earnings delivery and valuations that are not elevated versus history. However, the near-term path remains sensitive to US real-rate moves, foreign flows, Asian currency weakness and the durability of China’s demand recovery. Technology and North Asian markets have recently outperformed, while India’s AI infrastructure theme offers a differentiated earnings-led growth exposure according to Goldman Sachs.

Risks

• A sharp rise in yields, defined illustratively as more than 1.5 standard deviations above historical norms, could have a significant negative effect on Asian market liquidity and performance.
• Asian equities have historically weakened after the first Fed rate hike, with Japan, Taiwan, Korea and Hong Kong showing the greatest underperformance in recent tightening cycles.
• Persistently weak Chinese demand indicators and softer labour-market conditions could weigh on the regional macro outlook.
• Foreign outflows and weaker Asian currencies remain a near-term headwind for regional equities.

What to watch

• Whether the Fed delivers the additional October rate hike expected by Goldman Sachs and how US real yields respond.
• China’s loan prime rate, industrial production, retail sales, credit growth and evidence of demand recovery.
• Upcoming Asian inflation, trade, PMI, export-order and central-bank releases.
• Fund and hedge-fund positioning in China, Hong Kong, Korea, Taiwan and India.
• The durability of earnings upgrades in India AI infrastructure, data-centre hardware, power equipment and semiconductor-related companies.