MXAPJ Up 4% for the Week: Korea and Taiwan Lead as Foreign Capital Returns to Asian Equities

Overview

This Goldman Sachs Portfolio Strategy Team weekly tracking report for the Asia-Pacific region concludes that the MXAPJ Index rose approximately 4% this week, led by technology hardware, semiconductors, and automotive sectors, with South Korea and Taiwan markets leading globally. The report validates via multi-dimensional data that the rebound is driven by two factors: 'earnings beats' and 'marginal geopolitical improvements,' while revealing structural divergence in capital flows: foreign investors returned to Asia overall, but hedge funds favored China and Hong Kong, while Korean retail investors concentrated bets on individual stocks via newly launched leveraged ETFs. Although US GDP growth was revised down macroeconomically, corporate earnings resilience and liquidity support in Asia remain positive short-term factors.

Core views

Market Performance and Drivers: This week MXAPJ rose 3.7%-4%, showing significant internal divergence. Technology hardware, semiconductors, automotive, and materials sectors led, while consumer retail, internet, and real estate lagged. South Korea (+10%) and Taiwan (+6%) posted the highest gains, benefiting from AI-related demand and the realization of strong tech giant earnings during the Q1 season. In contrast, Philippines (-4%) and Hong Kong (-3%) underperformed. Since 2020, the MSCI Taiwan Index has appreciated cumulatively by 311%, and South Korea by 237%, significantly outperforming other emerging markets (-1%), demonstrating a strong relative return trend. Global Market Cap Restructuring: Taiwan has surpassed India to become the world's fifth-largest stock market (market cap approx. $5.1 trillion), with South Korea (approx. $4.9 trillion) following closely, trailing India by less than $30 billion. Within the MSCI Emerging Markets Index, Taiwan (26%) and South Korea (23%) have become the top two country weights, combined accounting for nearly half, far exceeding China's 20%, marking the further solidification of the core asset position of Asian tech manufacturing in global portfolios. Structural Divergence in Capital Flows: At the foreign investor level, EM Asia (excluding China) recorded a net inflow of $2.2 billion, primarily contributed by Taiwan (+$5.2 billion), which was partially offset by South Korea's net outflow (-$2.7 billion). However, hedge fund data presents a different picture: since May, Asian stocks have received sustained strong net buying, driven mainly by Japan, China, and Hong Kong. Specifically, net allocation to the China market rose to 8.7% (at the 70th percentile over the past five years), with both H-shares and A-shares seeing significant additions; Taiwan net allocation rose to 7.25% (five-year high); although foreign capital flowed out of Korea, hedge fund total allocation rose to 6.7% (five-year high). This divergence of 'foreign selling Korea, hedge funds buying China/Korea' reflects differential pricing of valuation and catalysts among different investors. Anomaly and Leverage in Korean Retail Behavior: With the launch of single-stock leveraged ETFs in Korea, retail investment behavior has shifted dramatically. Retail investors purchased approx. $1.3 billion of these products this week, while significantly redeeming traditional ETFs tracking the broader market. Currently, leveraged ETFs account for approx. 5% of the domestic ETF market share in Korea. Additionally, Korean retail investors hold nearly $15 billion in overseas (US/HK) leveraged products. This indicates that during market rebounds, local retail investors are leveraging high-volatility tools to amplify exposure to specific tech leaders (e.g., SK Hynix, Samsung Electronics) rather than making broad market allocations. Q1 Earnings Quality and Market Reaction: Among the 821 companies that have reported (covering 76% of MXAPJ market cap), 49% exceeded expectations, 27% missed, with a median surprise of +5%. By sector, Information Technology (Net Profit +185% YoY), Materials (+94% YoY), and Energy (+35% YoY) performed strongest, while Discretionary Consumption (-41% YoY) and Real Estate (-9% YoY) dragged performance. Notably, the market reaction to earnings showed asymmetry: stocks missing estimates fell significantly more than historical averages (especially in Korea, Australia, and India), while long-term alpha for stocks beating expectations was weaker than historical patterns, suggesting the market currently penalizes negative information more severely or prices in good news in advance.

Analysis framework

The report employs a typical three-dimensional analysis framework combining 'top-down macro + bottom-up micro + capital flow verification.' First, it identifies market themes (tech/earnings) through index returns and sector attribution. Second, it evaluates structural status changes using MSCI weight changes and global market cap rankings. Third, it cross-compares Foreign Institutional Investment (FII) and Prime Brokerage (hedge fund) capital flows to identify differences between institutional vs. retail and long-term vs. hot money. Finally, it backtests historical correlations between earnings surprises and subsequent price performance to assess market sentiment validity and risk appetite thresholds. This methodology not only explains 'what rose' but reveals 'who is buying' and whether the market is overreacting.

Methodology notes

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Relative Price Return vs. Local Index

  When analyzing post-earnings stock performance, the report used 'average price return relative to the local index' as a benchmark. This method isolates firm-specific Alpha by removing market Beta effects. Finding that 'stocks missing estimates fell more than historical averages' indicates that under current market conditions, the penalty coefficient for negative Alpha is amplified, serving as a key quantitative indicator for assessing market risk appetite fragility.

• Industry/Industrial Analysis FrameworkIndustry Concentration Analysis

  Evolution of MSCI EM Weights and Global Market Cap Rankings

  The report argues for the structural rise of specific regional assets by tracking long-term changes in country weights within the MSCI Emerging Markets Index (e.g., Taiwan rising to 26% since 2020) combined with global exchange market cap rankings. This analysis goes beyond short-term price movements, confirming the enhanced 'must-hold' attribute of Korean and Taiwanese tech assets in global portfolios from the perspective of index compilation rules and global capital allocation anchors.

• Event Betting and Behavioral FinanceCapital Flow/Chip Analysis

  Divergence Analysis of FII vs. Hedge Fund Holdings

  The report distinguishes between two types of capital: 'Foreign Investors (FII)' and 'Hedge Funds.' FII typically represents long-term allocation capital, while hedge funds represent trading capital. When their flows diverge (e.g., foreign investors sell Korea while hedge funds buy Korea), it often signals a period of market disagreement or style switching. This layered capital flow analysis is an important leading indicator for judging the sustainability of trends.

Asset mapping & comparison

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

• MSCI Taiwan Index

  Beneficiary: World's 5th largest market, #1 weight in MSCI EM, strong AI and semiconductor earnings

  Strengths

  Market cap exceeds India, sustained net foreign inflow (+$5.2B), hedge fund allocation at five-year high

  Weaknesses

  -

  Comparison

  Compared to Korea, foreign inflows are more sustained; compared to Mainland China, higher tech content and less geopolitical impact

  Risks

  -

• KOSPI / Korea Market

  Mixed Beneficiary/Detractor: Earnings surge but foreign outflow; retail leverage amplifies volatility

  Strengths

  Q1 Net Profit +218% YoY, hedge fund total allocation at five-year high, single-stock leveraged ETFs provide new liquidity

  Weaknesses

  Foreign weekly net outflow $2.7B, stocks missing estimates fell more than historical average, heavy retail leverage

  Comparison

  Compared to Taiwan, foreign sentiment is more hesitant; compared to Southeast Asia, greater tech elasticity but higher volatility

  Risks

  Risk of retail leverage unwinding, pressure from sustained foreign outflows

• MSCI China / H-Shares

  Beneficiary: Hedge fund allocation rose to five-year high, strong net buying in H-shares/A-shares

  Strengths

  April industrial profits surged, supported by upstream materials and AI demand; hedge fund net allocation 8.7% (70th %ile)

  Weaknesses

  Q1 earnings beat ratio only 36%, below regional average; discretionary consumption drag significant

  Comparison

  Compared to Korea/Taiwan, lower valuation but slower earnings recovery slope; compared to SE Asia, higher liquidity and institutional attention

  Risks

  Uncertainty in tariff policies, pace of domestic demand recovery

Key data

• MXAPJ Weekly Gain+3.7% ~ +4%Led by South Korea (+10%) and Taiwan (+6%); Laggards were Philippines (-4%) and Hong Kong (-3%)
• EM Asia Net Foreign Inflow+$2.2 BillionTaiwan +$5.2 Billion, South Korea -$2.7 Billion
• Q1 Earnings Beat Ratio49%Miss ratio 27%, Median surprise +5%
• Korean Retail Leveraged ETF Purchases~$1.3 BillionWeekly data, accompanied by redemptions in traditional broad-based ETFs
• Taiwan Weight in MSCI EM26%Surpassed China (20%) to become the largest weight country
• Hedge Fund China Net Allocation8.7%At 70th percentile over past five years
• IT Sector Q1 Net Profit Growth+185% YoYRevenue +48% YoY, Net margin increased 11.7pp
• Discretionary Consumption Q1 Net Profit Growth-41% YoYActual results accounted for only 16% of full-year estimate, significantly below seasonal norms

Impact & implications

The report believes the current Asia-Pacific rebound has a solid earnings foundation but is highly concentrated in technology and upstream materials. The rise in Taiwan and South Korea's global market cap rankings means continued allocation by passive funds and global allocators will become the norm. However, the leveraged behavior of Korean retail investors increases short-term volatility risks; if tech stocks correct, deleveraging could trigger chain reactions. For the China market, the rise in hedge fund allocation to five-year highs is a positive signal indicating smart money is repricing China asset value-for-money, though subsequent policy implementation and fundamental verification must be watched. Overall, the market is transitioning from 'earnings-driven' to 'valuation expansion,' though sensitivity to negative information remains high.

Risks

• Korean retail investors concentrate holdings via leveraged ETFs; a market correction could trigger accelerated deleveraging and volatility spikes.
• Stocks missing earnings estimates face harsher selling penalties in the current market environment compared to historical norms.
• Uncertainty remains regarding the US exemption list for Chinese tariffs ($30 billion non-strategic goods); Trump has not yet signed the US-Iran ceasefire memorandum.
• US Q1 GDP growth revised down to 1.6%; weak consumption and inventory may dampen global demand expectations.

What to watch

• Final signing status of the 60-day US-Iran ceasefire memorandum by President Trump.
• Results of public comments from the Office of the US Trade Representative regarding the $30 billion tariff exemption for Chinese goods.
• Subsequent interest rate decisions and inflation data from the Bank of Korea to verify the expectation of two hikes this year.
• China's May Manufacturing PMI data to observe whether industrial profit surges transmit to midstream manufacturing.
• Continuous subscription/redemption volumes of Korean single-stock leveraged ETFs as a high-frequency sentiment indicator.