Korea’s sharp selloff weighs on Asia-Pacific equities, but earnings upgrades and improved risk-reward after the correction still support a medium-term bullish view

Overview

Asia-Pacific equities excluding Japan came under pressure this week, with MXAPJ down 0.5%. Korea fell for the seventh consecutive week and recorded a weekly decline of about 8%, combined with US$5bn in foreign outflows, clearly offsetting gains of about 2% in Australia, China A-shares, and Singapore. By sector, health care, materials, and capital goods led, while technology hardware and semiconductors, utilities, and real estate lagged. The market was also affected by AI-related deleveraging, weaker Asian macro data, US-China trade and technology restrictions, oil price volatility triggered by expectations around the Strait of Hormuz, and joint US-Japan intervention in the yen.

Core views

Goldman Sachs believes the recent sharp decline in the Korean market reflects overly pessimistic fundamental expectations. Demand for AI computing power may still drive capital expenditure by hyperscale cloud service providers above US$1tr next year; memory chip shortages are expected to intensify further in 2027 and may continue into 2028 to 2030. Earnings for Korean non-memory companies are expected to grow 71% this year and 20% next year, while consensus 2027 earnings growth of 35% and a price-to-earnings ratio below 8x support the KOSPI target of 12,000 points. At the same time, retail margin financing and leveraged ETF exposure have contracted notably, reducing some forced deleveraging risk. At the regional level, earnings remain in an upgrade cycle, and the recent correction has also reduced drawdown risk, although upgrade momentum is slowing.

Analysis framework

The report cross-validates short-term risks and medium-term returns for Asia-Pacific equities by combining regional index and sector performance, foreign and retail fund flows, leveraged ETF exposure, corporate earnings releases, earnings revision indicators, valuation and earnings growth, return performance after historical major drawdowns, index rebalancing events, and macro and geopolitical indicators. Price and valuation data are mainly as of 4:00 p.m. Hong Kong time on August 7, 2026, while earnings and valuation indicators mainly use FactSet bottom-up consensus expectations.

Methodology notes

• Earnings momentumERLI

  Asia earnings revision leading indicator

  Assesses the direction of earnings forecast revisions through factors such as price and volume. The current indicator still points to earnings upgrades, but the pace of upgrades is slowing; technology hardware, industrials, materials, and insurance, as well as Korea and Taiwan, China, have relatively better revision prospects.

• Market riskRADaR

  Asia regional drawdown risk model

  Used to assess the risk of a further significant drawdown in Asian markets. The model shows that after the recent sharp market decline, downside risk has materially decreased.

• Target index valuationPrice-to-earnings ratio and earnings growth analysis

  Testing the reasonableness of the target level using earnings growth and valuation multiples

  Korea’s consensus 2027 earnings growth is about 35%, and its forward price-to-earnings ratio is below 8x, supporting the 12-month KOSPI target of 12,000 points.

• Target index valuationPrice-to-book ratio and return on equity analysis

  Estimating the target level based on book value growth, return on equity, and historical price-to-book relationships

  Goldman Sachs believes expected book value growth, return on equity, and historical price-to-book relationships also support the KOSPI target of 12,000 points.

• Historical scenario analysisKOSPI performance after major drawdowns

  Comparing 3-month, 6-month, and 12-month returns after drawdowns of more than 30%

  Historically, KOSPI has mostly delivered positive returns after severe drawdowns of more than 30%, with median subsequent 3-month, 6-month, and 12-month returns of about 16%, 43%, and 59%, respectively, although negative returns still occurred in certain periods.

• Event-drivenIndex rebalancing fund flow analysis

  Assessing the impact of major index inclusions and deletions on passive and active fund flows

  The report tracks review and effective dates for major indices such as JPX-Nikkei 400, MSCI, FTSE, Hang Seng, and CSI, and assesses potential fund flows based on benchmark-tracking assets and historical relative returns.

Asset mapping & comparison

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

• MSCI AC Asia Pacific ex Japan Index（MXAPJ）

  Core regional equity benchmark in the report

  Strengths

  Earnings are still being revised upward, the recent correction has reduced the risk of further drawdowns, and the 12-month target of 1,080 points offers about 25.6% upside versus the current 860 points.

  Weaknesses

  Regional macro data are generally soft, and the index’s high weight in Korea and technology hardware makes it vulnerable to concentrated selling.

  Comparison

  Australia, China A-shares, and Singapore significantly outperformed this week, while Korea, Hong Kong, China, and Thailand lagged.

  Risks

  Escalation of US-China trade and technology restrictions, downside to global growth, a halt in earnings upgrades, and continued foreign outflows.

• KOSPI

  Goldman Sachs’ key Overweight market

  Strengths

  Low valuation, expected 2027 earnings growth of 35%, tight memory chip supply-demand conditions, and earnings growth at non-memory companies support the 12,000-point target.

  Weaknesses

  Seven consecutive weeks of declines, concentrated semiconductor holdings, and foreign ownership significantly below the long-term average.

  Comparison

  Korea fell 8% this week, significantly underperforming MXAPJ and most regional markets, but historically medium-term returns after drawdowns of more than 30% have usually been strong.

  Risks

  Memory prices or demand falling short of expectations, slowdown in AI investment, continued net foreign selling, and passive selling triggered by leveraged retail trading.

• Korea leveraged ETFs

  Gauge of retail risk appetite and potential rebalancing fund flows

  Strengths

  Assets under management and leveraged exposure have declined significantly from their peaks, reducing systemic forced deleveraging pressure.

  Weaknesses

  Although potential daily rebalancing fund flows have declined by more than 50% from the peak, their impact relative to daily turnover remains significant.

  Comparison

  Assets under management have fallen from a peak of US$53bn to US$20bn, and leveraged exposure has declined from 3.2% of free-float market capitalization to 1.7%.

  Risks

  Daily rebalancing in high-volatility markets may create pro-cyclical trading and exacerbate market gains and losses.

• Asian technology hardware and semiconductors

  Key earnings driver for AI capital expenditure and the Korean market

  Strengths

  Capital expenditure by hyperscale cloud service providers may exceed US$1tr next year, memory supply shortages are expected to persist for years, and earnings revision prospects are relatively favorable.

  Weaknesses

  The sector lagged this week, the market is concerned about a second-derivative slowdown in profit growth in 2027, and capital expenditure expansion weighs on free cash flow in the short term.

  Comparison

  Technology hardware earnings revision prospects are better than those of many regional sectors, but current share price volatility and positioning crowding are higher.

  Risks

  AI demand or data center monetization falling short of expectations, escalation of export controls, and memory supply expansion outpacing demand.

• Brent crude oil

  Indicator of geopolitical and inflation risks

  Strengths

  May receive price support when supply routes are constrained or geopolitical risks escalate.

  Weaknesses

  Expectations of the Strait of Hormuz reopening once pushed prices briefly below US$80/bbl, showing that news-flow changes can quickly reverse trends.

  Comparison

  Compared with equity earnings factors, oil prices are mainly driven by geopolitics and supply expectations.

  Risks

  Repeated shifts in expectations around strait passage, supply disruptions, or weakening demand could all trigger significant volatility.

• Japanese yen

  Indicator for Asian cross-asset risk and policy intervention

  Strengths

  Rare joint intervention by US and Japanese authorities helps curb short-term disorderly volatility.

  Weaknesses

  The need for policy coordination itself reflects substantial pressure in the foreign exchange market.

  Comparison

  Yen volatility is linked to Asian equities, interest rates, and cross-border asset allocation.

  Risks

  Short-lived intervention effects, policy divergence, or changes in macro data may cause volatility to rise again.

Key data

• MXAPJ weekly performance-0.5%Australia, China A-shares, and Singapore each rose about 2%, while Korea fell 8%, Hong Kong, China fell 2%, and Thailand fell 1%.
• MXAPJ index targetCurrent 860 points; 12-month target 1,080 pointsCorresponds to approximately 25.6% potential upside.
• Korea foreign fund flowsNet outflow of about US$5bnIndia and Taiwan, China attracted inflows of about US$1.2bn and US$300mn, respectively.
• KOSPI target12-month 12,000 pointsGoldman Sachs maintains its Overweight view on the Korean market.
• Korea leveraged ETF sizeUS$20bnBelow the peak of US$53bn, with leveraged exposure declining from 3.2% of free-float market capitalization to 1.7%.
• Korea retail margin financing balanceDeclined from US$25bn to US$20bnCurrently about 0.5% of total market capitalization, down more than 25% from the recent peak.
• Korea non-memory corporate earnings growth forecastThis year +71%; next year +20%Shows that earnings support for the Korean market is not limited to memory chip leaders.
• CY2Q26 results reporting coverage321 companies, accounting for 58% of MXAPJ market capitalizationReported companies’ net profit increased 202% year-on-year and 48% quarter-on-quarter.
• CY2Q26 earnings surprise47% beat expectations; 24% missed expectationsMedian earnings surprise was +4.1%.
• CY6M26 earnings delivery49% of full-year expectationsBelow historical seasonal progress.
• AI hyperscale cloud service provider capital expenditureMay exceed US$1tr next yearInvestment expansion is mainly to meet computing demand, but near-term free cash flow may come under pressure.
• MSCI index reviewTo be announced after the US close on 2026-08-12Rebalancing is expected to take effect at the close on 2026-08-31 and may bring significant passive fund flows.

Impact & implications

In the short term, Korean foreign outflows, deleveraging by retail investors and leveraged ETFs, weaker Asian macro data, and geopolitical uncertainty may still amplify volatility. In the medium term, Korea’s low valuation, tight memory chip supply-demand conditions, earnings growth at non-memory companies, continued regional earnings upgrades, and more favorable risk-reward after the correction provide an upside foundation for Korea and MXAPJ. Portfolio allocation may focus on areas with stronger earnings revisions, such as technology hardware and semiconductors in Korea and Taiwan, China, as well as industrials, materials, and insurance, while also monitoring event-driven fund flows from index rebalancing; risk control should be maintained for highly leveraged trades, macro-sensitive markets, and shocks from oil prices and exchange rates.

Risks

• Further escalation of US-China trade, export controls, and technology restrictions.
• Continued foreign outflows from Korea and concentrated selling in semiconductors continuing to depress market valuations.
• AI capital expenditure growth or data center commercialization falling short of expectations, leading to downward revisions to technology earnings forecasts.
• Pro-cyclical deleveraging by leveraged ETFs and retail margin financing amplifying market volatility.
• China’s services and manufacturing data continuing to weaken, with Asian export demand slowing further.
• Declining manufacturing momentum in India and weak export demand from Taiwan, China to the United States and ASEAN.
• Strait of Hormuz-related developments triggering sharp volatility in oil prices and inflation expectations.
• Yen intervention effects failing to persist, with foreign exchange volatility transmitting to regional asset prices.
• CY6M26 earnings delivery falling below historical seasonality, with subsequent results potentially failing to meet full-year expectations.
• Passive fund flows from index rebalancing causing short-term price distortions in individual stocks and markets.

What to watch

• MSCI index review results after the US close on August 12, 2026, and rebalancing fund flows on August 31, 2026.
• Korea net foreign buying and selling, foreign positioning in the semiconductor sector, and changes in retail margin financing balances.
• Korea leveraged ETF assets under management, daily rebalancing exposure, and its size relative to market turnover.
• Whether ERLI continues to remain positive, and earnings revision trends in technology hardware, industrials, materials, and insurance.
• Whether the RADaR model continues to show relatively low regional drawdown risk.
• Remaining CY2Q26 company results, the proportion of earnings surprises, and full-year earnings delivery.
• China PMI, trade growth, Taiwan, China exports, and India manufacturing data.
• AI hyperscale cloud service provider capital expenditure, free cash flow, and progress in monetizing new data centers.
• Memory chip supply-demand, prices, and the pace of capacity expansion from 2027 to 2030.
• US-China trade and technology policies, Strait of Hormuz developments, Brent oil prices, and yen policy intervention.