Taiwan equities pulled back with tech leading losses, record foreign outflows met by retail dip-buying

Overview

This report is Goldman Sachs' weekly strategy update on the Taiwan market, focusing on Taiwan equity performance, sector rotation, foreign and local fund flows, ETF flows, hedge fund and mutual fund positioning, valuations, EPS revisions, the TSMC ADR premium reversal indicator, policy and geopolitical risk indicators, and macro data. The core backdrop is that Taiwan equities saw a sharp pullback this week led by tech stocks, while TWD weakened and foreign investors posted record outflows, but retail investors and some local funds bought during the correction.

Core views

The report's core view is that, in the short term, the Taiwan market is under pressure from the unwind of crowded tech positioning, AI stock volatility, foreign outflows, and elevated valuations; but in the medium term, Goldman Sachs still assigns Taiwan an OW rating in its Asia-Pacific allocation, and the TWSE target level implies positive returns. Sector-wise, information technology remains the core weighting and earnings driver in Taiwan, but it was also the area of the most concentrated foreign selling this week; healthcare, energy, chemicals, and staples were relatively resilient. Flows were divergent: foreign investors exited, retail investors bought the dip, and local funds bought more non-tech sectors.

Analysis framework

The report uses a combination of top-down and cross-sectional analysis: first comparing Taiwan index performance with Asia-Pacific markets, then breaking down sectors, style factors, and valuations; it then tracks changes in QFIL/foreign investor, local fund, retail, ETF, futures, and fund positioning; finally, it combines EPS revisions, macro data, the TSMC ADR premium reversal index, and cross-strait risk indicators to assess near-term market pressure and medium-term allocation attractiveness.

Methodology notes

• Market allocationGS Asia-Pacific market allocation and index target

  Assess the relative attractiveness of regional markets using index targets, expected upside, and total return.

  Taiwan is listed as OW in Goldman Sachs' Asia-Pacific allocation table, with the TWSE at 44,572 and a 12-month target of 51,000, implying 14% upside and 17% total return.

• Flow analysisQFIL/local institutional/retail flow tracking

  Identify sources of market pressure through changes in cash equities, futures, and holdings across different investor types.

  This week, foreign net outflows were concentrated in tech stocks, retail investors posted strong net buying in cash equities, and local funds preferred buying non-tech sectors, showing that selling pressure and buying support came from different investor groups.

• Valuation frameworkf12m/f24m P/E and P/B valuation percentiles

  Measure market valuation pressure using forward P/E, historical standard deviations, and the relationship between P/B and ROE.

  Taiwan market f12m/24m P/E stands at 21.3x/17.0x, at +2.8/+2.1 standard deviations, indicating valuations are in an elevated range and more sensitive to risk appetite in the short term.

• Earnings revisionsConsensus EPS revisions

  Observe earnings momentum and relative sector strength through 2026E/2027E EPS revisions.

  The report shows 2027E consensus EPS was revised up by 1.0%, with positive revisions mainly from tech, capital goods, and financials, while defensive sectors were relatively weaker.

• Risk indicatorsTSMC ADR premium reversal index (GSSRTSMR) and cross-strait risk indicators

  Assess changes in Taiwan market risk premium using the ADR premium, reversal signals, and policy/geopolitical risk indicators.

  The TSMC ADR premium fell to 18%, GSSRTSMR was +0.3, suggesting a potential reversal; the cross-strait risk indicator GSSRCRSI declined to 92.

Asset mapping & comparison

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

• Taiwan equities/TAIEX/MSCI Taiwan

  The report's core covered assets and the main subject of this week's market performance, flow, and valuation analysis.

  Strengths

  Goldman Sachs maintains OW in Asia-Pacific allocation, the TWSE target level implies positive returns, and macro and earnings data remain supportive.

  Weaknesses

  The decline this week was significant, foreign outflows were large, and valuations are in a historically elevated range.

  Comparison

  This week's performance lagged MXAPJ by 0.5 percentage points, but the 12-month target return remains attractive.

  Risks

  Concentrated tech weights, continued foreign selling, valuation derating, and TWD weakness could amplify volatility.

• TSMC and Taiwan semiconductors/technology hardware

  The largest weight in Taiwan indices and the core source of this week's sell-off, as well as the main destination of foreign outflows.

  Strengths

  Technology and semiconductors remain key drivers of Taiwan earnings growth and EPS upgrades.

  Weaknesses

  Technology hardware fell 8% this week, TSMC fell 3%, and foreign investors were large net sellers of TSMC and other tech stocks.

  Comparison

  Compared with healthcare, energy, chemicals, and staples, the tech sector significantly underperformed this week.

  Risks

  AI stock volatility, de-positioning, ADR premium reversal, and valuation compression are the main risks.

• Taiwan non-tech sectors

  Used as a direction for market diversification and buying support, helping observe sector resilience outside the tech sell-off.

  Strengths

  Healthcare rose 1%, while energy, chemicals, and staples were roughly flat; local funds recorded net buying in non-tech sectors.

  Weaknesses

  Some consumer, defensive, and real estate sectors have weaker strategy ratings or insufficient earnings revisions.

  Comparison

  Relative to technology hardware and semiconductors, non-tech sectors were more resilient this week.

  Risks

  If macro conditions slow or funds withdraw from risk assets overall, non-tech sectors could also be dragged down.

• Taiwan ETFs

  Used to gauge allocation changes among passive funds, dividend strategies, and non-dividend products.

  Strengths

  Non-dividend ETFs recorded inflows of about US$1.1bn this week.

  Weaknesses

  Dividend ETFs saw outflows of about US$250mn, showing some cooling in income-oriented products.

  Comparison

  Non-dividend products outperformed dividend products, with internal divergence in ETF flows.

  Risks

  If market volatility intensifies, ETF redemptions and passive rebalancing could amplify volatility in individual stocks and sectors.

• TWD/USDTWD

  A macro feedback variable for Taiwan market risk appetite and foreign fund flows.

  Strengths

  Goldman's macro forecast shows year-end TWD/USD of 31.0 and 29.1 for 2026E and 2027E, respectively, implying possible medium-term improvement versus current levels.

  Weaknesses

  TWD closed at 31.9 this week, down 1.1% for the week, coinciding with foreign outflows.

  Comparison

  TWD weakness increased near-term pressure on Taiwan assets in USD terms.

  Risks

  Foreign outflows, USD strength, rate differentials, and geopolitical risk may continue to weigh on the currency.

Key data

• Weekly performance of TAIEX/MSCI Taiwan-4.1%Underperformed MXAPJ by 0.5 percentage points, representing a market pullback led by tech stocks.
• TWD FX performance31.9, down 1.1% for the weekTWD weakness occurred alongside foreign outflows and declining risk appetite.
• Foreign investor/QFIL flowsabout -US$11.3bnNet outflows were mainly concentrated in the tech sector, including about -US$3.5bn in TSMC and about -US$5.4bn in other tech stocks.
• Retail cash equity flowsabout +US$9bnRetail investors bought the dip, while margin ratios rose, but long futures positions decreased by about US$2bn.
• Local fund flowsabout +US$0.8bnMainly bought non-tech sectors while selling tech stocks other than TSMC.
• ETF flowsNon-dividend ETFs about +US$1.1bn, dividend products about -US$250mnWithin ETFs, flows diverged from dividend products toward non-dividend products.
• Taiwan market valuationf12m/24m P/E at 21.3x/17.0xEquivalent to +2.8/+2.1 standard deviations, with valuations still at elevated levels.
• 2027E EPS revision+1.0%Revisions were stronger in tech, capital goods, and financials, and weaker in defensive sectors.
• TSMC ADR premium18%, down 3 percentage points for the weekGSSRTSMR was +0.3, and the report suggests there is a potential reversal signal.
• May macro dataIndustrial production +11.8%, retail sales +4.9%, export orders +47.2%Industrial production slowed from +14.9% in April, but export orders still maintained strong growth.
• TWSE index targetCurrent 44,572, 12-month target 51,000Corresponding to 14% target upside and 17% total return.

Impact & implications

In investment terms, this week's correction shows that Taiwan equities remain prone to sharp volatility under high valuations, concentrated tech weights, and changes in foreign positioning; however, buying support from retail and local funds, upward earnings revisions, and Goldman's maintained OW rating provide medium-term support. If foreign outflows continue to widen, AI-related stock volatility intensifies, or the TSMC ADR premium reverses further, the Taiwan market may remain under pressure in the short term; if EPS revisions continue and macro data stay strong, the pullback could offer a better medium-term entry point for allocation.

Risks

• Continued net foreign/QFIL outflows, especially sustained selling pressure on tech stocks and TSMC.
• Volatility in AI-related stocks and the unwind of crowded positions may continue to drag on Taiwan's tech heavyweights.
• Taiwan market f12m/24m P/E is at high standard deviation levels, making valuations sensitive to changes in rates, earnings, and risk appetite.
• Retail dip-buying and rising margin ratios may create subsequent deleveraging risk.
• TWD weakness may increase pressure on foreign investor returns and affect overseas allocation willingness.
• Narrowing of the TSMC ADR premium and reversal signals from GSSRTSMR may affect the relative performance of TSMC and Taiwan local shares.
• Cross-strait risk, policy risk, and changes in global fund risk appetite still need to be monitored.

What to watch

• Next week's consumer confidence data and S&P manufacturing PMI.
• Foreign/QFIL net cash equity buying and selling, net futures short positions, and changes in tech stock holdings.
• Whether retail cash equity buying continues, and whether margin ratios keep rising.
• TSMC ADR premium, GSSRTSMR readings, and changes in TSMC's contribution to the index.
• Whether 2026E and 2027E EPS revisions continue to be driven by tech, capital goods, and financials.
• Whether ETF funds continue to flow out of dividend products and into non-dividend products.
• TWD走势、USDTWD变化和两岸风险指标GSSRCRSI。