MXAPJ gained 2.3% for the week, with offshore China and India leading; Korea was disrupted by leveraged ETFs and capital flows

Overview

This is a Goldman Sachs Asia Pacific weekly strategy report covering MXAPJ market performance, regional and sector rotation, Korean leveraged ETF and margin risks, the July performance review, second-quarter earnings, valuation, capital flows, risk indicators, and the macro event calendar. The report's central message is that Asia Pacific ex-Japan equities have recently experienced significant divergence and capital-flow disruptions, but risk indicators have improved after the pullback and the index still has upside potential over the next 12 months.

Core views

The report finds that MXAPJ rose 2.3% this week, driven mainly by offshore China, India, and Australia; Software & Services and Internet/Media outperformed, while Capital Goods and Energy lagged. Although Korea rebounded 18% on Friday, supported by US$5.2bn of foreign inflows, it still fell 1% for the full week and was affected by leveraged ETF holdings, daily rebalancing, and regulatory restrictions. Goldman Sachs emphasizes that rising volatility, greater stock-level return dispersion, and declining correlations indicate a more micro-driven market, with China, Australia, Taiwan, and Singapore potentially offering greater alpha opportunities.

Analysis framework

The report uses a multidimensional framework encompassing regional index performance, sector relative returns, foreign and retail capital flows, leveraged ETF AUM and margin lending, the proportion of earnings beats, EPS revisions, valuation percentiles, volatility and correlation indicators, macro forecasts, and the event calendar to conduct a weekly strategy assessment of Asia Pacific ex-Japan markets.

Methodology notes

• Market strategyMXAPJ regional and sector performance framework

  Identify market rotation through the relative performance of regions, sectors, themes, and styles.

  The report compares the performance of offshore China, India, Australia, Korea, and Taiwan, as well as sectors such as Software & Services, Internet/Media, Capital Goods, and Energy, to assess short-term momentum and allocation direction.

• Capital flow analysisForeign and retail capital flow tracking

  Measure market risk appetite using cross-border capital flows and local retail capital flows.

  The report notes that EM Asia ex-China experienced US$1.4bn of weekly foreign outflows, primarily from Taiwan; Korea and Taiwan have recently seen significant foreign outflows, while South Asia attracted inflows.

• Risk monitoringVolatility, dispersion, and correlation framework

  Assess alpha opportunities using index volatility, stock volatility, return dispersion, and correlations.

  The report believes that average stock correlations have declined to the lower end of their historical range while return dispersion remains high, indicating a more micro-driven market and greater stock-selection opportunities.

• Earnings analysisCY2Q26 earnings review

  Assess fundamentals using the proportion of earnings beats, median surprises, and actual earnings progress.

  Among companies that had reported, 45% beat expectations and 23% missed them, with a median surprise of +3.7%, but actual CY6M26 earnings represented 48% of full-year estimates, lagging historical seasonality.

Asset mapping & comparison

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

• MXAPJ

  Core covered index

  Strengths

  Rose 2.3% for the week; Goldman Sachs' 12-month target is 1080, implying approximately 25% upside.

  Weaknesses

  Experienced a modest pullback in July, with selling in technology and industrial sectors weighing on the index.

  Comparison

  Compared with the United States and Europe, the report provides a framework for MXAPJ relative valuation and the EPS trajectory.

  Risks

  Capital outflows, rising volatility, and earnings progress lagging historical seasonality.

• Korea equities

  Key risk market

  Strengths

  Rebounded strongly on Friday, supported by US$5.2bn of foreign inflows; June industrial production was better than expected.

  Weaknesses

  Still fell approximately 1% for the full week, with prominent risks related to leveraged ETFs and margin trading.

  Comparison

  Compared with South Asia's capital inflows, Korea and Taiwan have faced greater recent pressure from foreign outflows.

  Risks

  Daily rebalancing of leveraged ETFs, regulatory restrictions, and rising margin-loan-to-deposit ratios.

• China offshore equities

  One of the leading markets this week

  Strengths

  Rose approximately 4% for the week; the Politburo meeting reinforced its easing language.

  Weaknesses

  July PMI indicated a slowdown in manufacturing, services, and construction activity.

  Comparison

  Outperformed A-shares China, which fell approximately 1% this week.

  Risks

  Slowing macroeconomic activity and policy implementation falling short of expectations.

• India equities

  One of the leading markets this week

  Strengths

  Rose approximately 3% for the week; South Asia attracted approximately US$3bn of foreign inflows over the past month.

  Weaknesses

  The report indicates that the proportion of earnings beats was relatively unremarkable in some areas.

  Comparison

  Capital flow performance was stronger than in Korea and Taiwan.

  Risks

  Valuation, macroeconomic data, and policy meeting risks.

Key data

• MXAPJ weekly performance+2.3%Led by offshore China, India, and Australia.
• Offshore China weekly performance+4%One of the leading regions this week.
• India weekly performance+3%One of the leading regions this week.
• Australia weekly performance+2%Outperformed most regions this week.
• EM Asia ex-China weekly foreign flows-US$1.4bnDriven mainly by US$2.6bn of outflows from Taiwan, partly offset by US$0.5bn of inflows into Korea.
• Korean leveraged ETF AUMUS$24bnDown from a peak of US$53bn, with leveraged exposure equivalent to 1.9% of the market's free-float capitalization.
• Korean foreign inflows on FridayUS$5.2bnSupported a Friday rebound in the Korean market, although it still fell approximately 1% for the full week.
• Foreign outflows from Korea and TaiwanUS$57bnCombined foreign outflows since late June.
• CY2Q26 earnings beat ratio45% beats vs. 23% missesThe median earnings surprise was +3.7%.
• MXAPJ target1080Goldman Sachs' 12-month target, implying approximately 25% upside from the current level of 863.

Impact & implications

For portfolios, the report suggests that Asia Pacific ex-Japan markets should not be traded solely on an index-directional basis; greater attention should be paid to regional and sector divergence. Offshore China, India, and Australia have stronger short-term momentum, while China, Australia, Taiwan, and Singapore may offer better alpha opportunities in a high-dispersion environment. However, foreign outflows from Korea and Taiwan, Korean leveraged ETF rebalancing, the rising ratio of margin loans to deposits, and uncertainty around policy and macroeconomic data still require position and risk controls.

Risks

• Daily rebalancing of Korean leveraged ETFs could still have a significant impact on the market.
• Korean margin loans have declined only 14% from their peak, while deposit balances have fallen by more than 20%, indicating rising leverage pressure.
• Korea and Taiwan have experienced combined foreign outflows of US$57bn since late June, indicating weaker risk appetite in North Asia.
• Macro variables including the US FOMC, US GDP and Core PCE, Asian PMIs, and central bank meetings could affect risk assets.
• China's July PMI indicated a slowdown in manufacturing, services, and construction activity.
• Actual CY6M26 earnings progress was 48% of full-year estimates, lagging historical seasonality.

What to watch

• Korean leveraged ETF AUM, daily rebalancing flows, and the margin-loan-to-deposit ratio.
• Foreign capital flows in EM Asia ex-China, particularly changes in flows to Taiwan, Korea, and South Asia.
• China's PMI, implementation of Politburo policy easing, and subsequent economic data.
• The US FOMC, nonfarm payrolls, Core PCE, and changes in US Treasury yields.
• Subsequent CY2Q26 earnings releases, EPS revisions, and whether ERLI continues to support upward earnings revisions.
• Stock-level dispersion and alpha opportunities in China, Australia, Taiwan, and Singapore.