Goldman Sachs upgrades Taiwan to overweight, North Asia tech becomes core allocation

Overview

This is a weekly stock strategy report from Goldman Sachs' Asia-Pacific division, focusing on: In the context of MXAPJ falling 2% and significant foreign capital outflows, institutions have upgraded allocations to Taiwan and South Korea based on improved earnings expectations, while adopting a more cautious stance towards China H-shares. The report believes that earnings are currently the key driver of returns in the Asia-Pacific stock market, with the strongest growth in AI and technology hardware supply chains in North Asia.

Core views

The report's core judgment is "earnings-driven returns, continue to increase exposure to North Asia." Specifically: Market level: MXAPJ fell 1.7% weekly, but there was significant internal differentiation. The Philippines (+5%), Malaysia (+1%), and Thailand (+1%) outperformed, while Indonesia (-9%), Hong Kong (-5%), and South Korea (-3%) lagged. Sector-wise, media entertainment, consumer retail services, and banking led, while capital goods, healthcare, and real estate lagged. Capital flow level: EM Asia (excluding China) experienced $16.5bn of net foreign capital outflows, with South Korea (-$1.21bn) and Taiwan (-$0.24bn) as the main outflow areas, reflecting selling pressure after prior sharp gains. However, local retail investors in South Korea flowed in strongly ($8.2bn), while retail investors in Taiwan flowed out modestly (-$0.5bn). Allocation adjustments: Based on the growth prospects of earnings, Goldman Sachs upgraded Taiwan from neutral to overweight (Overweight) and significantly raised the 12-month target for KOSPI to 12,000 points. At the same time, it downgraded China H-shares (MSCI China) from overweight to neutral (Marketweight), citing its underperformance year-to-date, weak profitability in soft tech and internet sectors, and rising opportunity costs of holding. However, A-shares remain overweight, due to improved growth, liquidity support, diversified returns, and exposure to hard tech/AI. Index targets: MXAPJ's 12-month target was raised to 1,080 (previously lower), implying approximately 22% total return in USD. The target increase is mainly driven by improved earnings expectations. The forecast path is: 3 months 980 / 6 months 1,030 / 12 months 1,080. Hedging recommendations: Considering the significant prior gains and rising speculative signs in South Korea and Taiwan, the report recommends using put spread collars to hedge against potential drawdown risks.

Analysis framework

Goldman Sachs' analytical framework centers on "revisions in earnings expectations" as the main theme, aided by two proprietary models: ERLI (Earnings Revision Leading Indicator, Earnings Revision Leading Indicator) and RADaR (Regional Asia Drawdown Risk Model). ERLI continues to show a trend of earnings revisions led by technology and North Asia, while RADaR indicates that the risk of moderate (10-20%) or significant (>20%) drawdowns has risen again after rapid rebounds. In regional comparisons, the report uses "growth/earnings revision differences" to explain market performance differentials — South Korea and Taiwan have significantly outperformed year-to-date, primarily due to substantial upward revisions in earnings expectations for their AI and technology hardware supply chains. Excluding Samsung Electronics and SK Hynix, South Korea's earnings growth rate has exceeded 50%, indicating opportunities beyond memory stocks. For China, the analysis adopts a "Three Chinas" framework: large offshore stocks, large onshore stocks, and high-tech strategic emerging industries. It argues that MSCI China's underperformance is mainly due to weakness in soft tech and internet sectors, while A-shares and hard tech sectors still have structural opportunities.

Methodology notes

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  ERLI (Earnings Revision Leading Indicator)

  Goldman Sachs' proprietary earnings revision leading indicator, tracking changes in analyst earnings forecasts to predict market direction; when this indicator is positive, it typically means there is significant upward pressure on earnings in the coming months, supporting stock prices

• Quantitative/Factor/Portfolio TheoryStyle factor analysis

  RADaR (Regional Asia Drawdown Risk Model)

  Regional Asia drawdown risk model, used to assess the probability of a moderate (10-20%) or significant (>20%) drawdown following recent rapid rallies, helping investors determine whether hedging is needed

• Industry/Industrial Analysis FrameworkUpstream-Middle-Downstream Supply Chain Transmission

  Hardware Priority Transmission in AI Supply Chain

  In this AI investment cycle, earnings and valuation improvements have been realized first in semiconductor and server hardware segments, then gradually moving toward software and applications; South Korea and Taiwan have benefited significantly due to their high global share in the AI hardware supply chain

• Valuation MethodPE/PEG valuation

  PEG (Price-to-Earnings Ratio Relative to Earnings Growth Rate) Comparison

  The report compares the PEG ratios of various markets to identify relative valuation attractiveness; Taiwan and South Korea have high earnings growth rates, so although their absolute PE is not low, their PEG is relatively low, indicating valuation still supports

Key data

• MXAPJ Weekly Decline-1.7%Dragged down by foreign capital outflows
• Net Foreign Capital Outflows from EM Asia (excluding China)US$16.5bnSouth Korea -121bn, Taiwan -24bn as main outflows
• KOSPI 12-Month Target12,000Significantly raised, implying 47% upside
• Taiwan TWSE 12-Month Target51,000Implies 13% upside
• MXAPJ 12-Month Target1,080Raised, implying 22% total return in USD
• Scale of Korean Retail Leverage ETFs~US$35bnAccounts for 1.2% of free float market value, speculative signs rising
• Earnings Growth Rate of South Korean Market Excluding Memory Stocks>50%Indicates strong growth outside memory sectors
• DRAM/NAND Supply-Demand Gap (2026E)-5.0% / -4.4%Supply shortages drive price and profit increases

Impact & implications

The report believes that the core contradiction in the current Asia-Pacific stock market is "divergent earnings growth" rather than overall overvaluation. North Asia (South Korea, Taiwan) remains the preferred allocation due to their deep integration into the global AI supply chain, with continuously upward-revised earnings expectations. China H-shares are seen as lacking catalysts due to weak profitability in internet/soft tech sectors, and institutions recommend indirect exposure through A-shares and thematic investments (such as hard tech and AI). For investors, this means: 1) Overweighting North Asia and hard tech remains the main theme; 2) Attention should be paid to speculative risks in South Korea and Taiwan, with options hedging considered; 3) Opportunities in China are more reflected in structural themes rather than at the index level.

Risks

• Continued large-scale foreign capital outflows from South Korea and Taiwan markets
• Speculative risks and potential drawdown pressures from the surge in the scale of Korean retail leverage ETFs (~$35bn, accounting for 1.2% of free float market value)
• Geopolitical risks remain high (Hezbollah refuses to halt hostilities, US-Iran negotiations stall)
• Further tightening of US export controls on Chinese AI-related technologies
• Increased medium-term drawdown risk for MXAPJ after rapid rebound (RADaR model indicates)

What to watch

• June 16 Japan Bank of Japan meeting
• June 16-17 Federal Reserve FOMC meeting and economic projections summary
• China June exports, CPI, PPI data
• South Korea June unemployment rate
• July Politburo Economic Work Conference in China