Foreign inflows and earnings resilience drive a rebound in Asia-Pacific ex-Japan equities
AI summary card
Foreign inflows and earnings resilience drive a rebound in Asia-Pacific ex-Japan equities
MXAPJ rose 2.7% for the week, led by South Korea and Taiwan; technology and deep-cyclical sectors drove the rebound, while CY2Q26 earnings surprises were broadly positive.
- MXAPJ rose 2.7%, with South Korea up 13% and Taiwan up 3%, while offshore China fell 3%.
- Emerging Asia ex-China recorded US$9.6 billion in net foreign inflows, including US$5.4 billion into Taiwan and US$4.2 billion into South Korea.
- A total of 417 companies have reported CY2Q26 earnings, covering 68% of MXAPJ market capitalization; 47% beat expectations and 24% missed, with a median earnings surprise of 4.5%.
- MSCI index changes effective August 31 are expected to generate more than US$35 billion in two-way passive flows across Asia-Pacific.
Report interpretation
Overview
This report is Goldman Sachs' weekly strategy update on Asia-Pacific ex-Japan equities. It argues that South Korea and Taiwan have again become regional market leaders since the late-July lows, with technology and deep-cyclical sectors as the primary drivers; meanwhile, resilient CY2Q26 earnings have provided fundamental support to the market.
Core views
The near-term market is supported by foreign inflows, the technology cycle, and positive earnings surprises. Although South Korea and Taiwan have received approximately US$9 billion in inflows since late July, they still show combined year-to-date foreign outflows of around US$144 billion, indicating that the flow recovery remains incomplete. Sector preferences are technology hardware and semiconductors and capital goods; materials and energy also have relatively high proportions of earnings beats.
Analysis framework
Cross-assesses regional and sector relative returns, foreign and active-fund positioning, MSCI index rebalancing flows, leveraged ETF positions, the distribution of earnings surprises, earnings revisions, valuations, and macro forecasts.
Methodology notes
Tracks net foreign inflows, active fund positioning relative to benchmarks, and potential passive flows triggered by index rebalancing.
Used to identify short-term supply-demand changes and potential trading disruptions across regions and sectors.
Compares reported earnings with consensus expectations and monitors revisions to market and sector earnings forecasts.
Earnings beats generally correspond to stronger relative share-price performance, while misses may result in more pronounced pullbacks.
Uses a long-short momentum factor to measure the extent of the recovery in trend-following trades.
The momentum factor has rebounded 10% from its lows but remains 16% below its late-June peak, indicating that the trend recovery is still incomplete.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- MXAPJCore regional benchmark
- Strengths
- Resilient earnings, foreign inflows, and a rebound led by technology and cyclical sectors.
- Weaknesses
- Divergent internal market performance, with offshore China, Australia, and Hong Kong weakening during the week.
- Comparison
- South Korea and Taiwan significantly outperformed other regional markets.
- Risks
- Reversal in foreign flows, weaker macro data, and index rebalancing shocks.
- South Korean equitiesKey beneficiary market
- Strengths
- Rose 13% during the week, received US$4.2 billion in foreign inflows, and saw increased technology positioning.
- Weaknesses
- Leveraged ETF exposure remains market-relevant, while retail investors were net sellers during the week.
- Comparison
- One of the strongest markets in the regional rebound.
- Risks
- MSCI rebalancing is expected to result in approximately US$1.1 billion in net passive outflows, and stocks missing earnings expectations may see larger declines.
- Taiwanese equitiesKey beneficiary market
- Strengths
- Rose 3% during the week, received US$5.4 billion in foreign inflows, and benefited significantly from the technology cycle.
- Weaknesses
- Asia and emerging-market funds remain underweight Taiwan and reduced exposure in July.
- Comparison
- Alongside South Korea, it has led both year-to-date performance and the recent rebound.
- Risks
- Positioning adjustments in technology hardware and semiconductors, retail selling, and changes in earnings expectations.
- Technology hardware and semiconductorsOverweight sector
- Strengths
- A major driver of the market rebound, with 52% of information technology companies beating earnings expectations.
- Weaknesses
- Taiwan technology hardware and semiconductors have recently seen fund-position reductions.
- Comparison
- Stronger relative performance than internet and media and consumer retail.
- Risks
- Valuations, crowded positioning, and volatility in global technology demand.
- Capital goodsOverweight sector
- Strengths
- Supported by a deep-cyclical recovery and growth expectations.
- Weaknesses
- Sensitive to macroeconomic growth and trade cycles.
- Comparison
- Goldman Sachs lists it as overweight, ahead of defensive sectors and some financial sectors.
- Risks
- Global manufacturing, exports, and policy uncertainty.
Key data
- Weekly MXAPJ performance+2.7%South Korea +13%, Taiwan +3%, Singapore +1%; offshore China -3%.
- Foreign inflows into Emerging Asia ex-China+US$9.6 billionTaiwan +US$5.4 billion, South Korea +US$4.2 billion.
- CY2Q26 earnings reporting progress417 companies, covering 68% of market capitalizationNet profit grew 162% year-on-year and 42% quarter-on-quarter, respectively.
- CY2Q26 earnings surprises47% beat expectations, 24% missed expectationsMedian earnings surprise was +4.5%.
- Potential two-way MSCI rebalancing flowsMore than US$35 billionExpected to take effect on August 31; Japan, India, Taiwan, and China may see net inflows, while South Korea, Australia, Malaysia, and Indonesia may see net outflows.
- South Korean leveraged ETF assetsUS$25 billionRecovered from a low of US$16 billion, primarily driven by asset returns rather than new demand.
- MXAPJ 12-month target1080Implying approximately 22% upside from the current level of 883.
Impact & implications
The report's central implication is that the rebound in Asia-Pacific ex-Japan equities has both fundamental and flow support, with the technology theme in South Korea and Taiwan offering the greatest upside sensitivity. Investors may focus on technology hardware and semiconductors, capital goods, and cyclical sectors with concentrated earnings beats, while distinguishing fundamentally driven gains from short-term liquidity effects caused by index adjustments and leveraged-product rebalancing.
Risks
- MSCI index rebalancing may trigger significant market- and stock-level flow volatility around August 31.
- The recent rebounds in South Korea and Taiwan have been rapid; volatility could increase if foreign inflows slow or reverse.
- Weaker-than-expected Chinese inflation data and divergent regional macro data may affect earnings and risk appetite.
- Valuations, positioning, and changes in global demand for technology hardware and semiconductors could amplify drawdowns.
- Daily rebalancing of leveraged and inverse ETFs may continue to affect trading volumes and volatility in the South Korean market.
- Geopolitics, policy uncertainty, and changes in U.S.-China relations may affect regional risk premia.
What to watch
- Actual flows from the August 31 MSCI index adjustments and the performance of related stocks in South Korea, Taiwan, and China.
- Whether foreign inflows into South Korea and Taiwan can persist, and whether active fund positioning continues to improve.
- Remaining CY2Q26 earnings releases, the proportion of beats, and earnings forecast revision trends.
- The impact of China's industrial production, retail sales, credit, and LPR data on policy expectations.
- U.S. inflation, retail sales, and Federal Reserve policy expectations.
- South Korean leveraged ETF asset levels, rebalancing flows, and changes in retail margin balances.