Both Index Adjustments Point to Stronger Passive Inflows into Technology

Overview

This global weekly report centers on the FTSE Russell and Hang Seng index reviews, analyzing the potential regional and sectoral passive fund flows arising from index adjustments. Its main conclusion is that technology continues to outperform, while market performance, the macro calendar, earnings, valuations, styles, fund flows, and cross-asset indicators provide the global market context.

Core views

The report first reviews market performance for the week ended Friday, August 21. The US and Japan fell 1.5% and 3.3%, respectively, while Europe, emerging markets, and Asia ex-Japan rose 0.2%, 1.2%, and 0.9%, respectively, demonstrating clear regional divergence. At the sector level, energy and materials, as well as healthcare, were among the stronger performers; Brent crude rose 6.1%, supporting the energy sector. Gold rose 4.6% following US Treasury buybacks, representing another notable cross-asset move during the week. The report's core analysis focuses on passive fund reallocation triggered by the FTSE Russell semiannual global equity index review. Within Asia-Pacific, China, South Korea, Taiwan, China, and India are expected to attract the largest group of inflows; Japan, by contrast, is expected to face stronger selling pressure after the adjustments are implemented. The sector impacts are similarly uneven: technology hardware and semiconductors, along with capital goods, are expected to receive the strongest inflows, while banks and automobiles may become the main sources of passive outflows. The rationale is that changes in index constituents and weights force passive funds tracking the relevant indices to rebalance accordingly, allowing the review results to be mapped into mechanical buying and selling demand at the country and sector levels. The Hang Seng Indexes Company review results reinforce the same technology bias. Technology hardware and semiconductors, software and services, and internet and media are expected to receive the largest inflows, while banks, utilities, and consumer retail may experience the largest outflows. Both independent index systems point to outperformance by technology-related industries, leading the report to conclude that "passive flows continue to favor technology." By contrast, banks are on the outflow side in both reviews; automobiles are primarily affected by the FTSE Russell adjustments, while the pressure on utilities and consumer retail mainly stems from the Hang Seng index adjustments. The global local-index table further illustrates market divergence, although the data in the table represent US dollar price returns relative to MSCI AC World rather than the absolute returns of each market. Markets with strong one-week relative performance included South Africa at 5.1%, Brazil and Hong Kong, China at 4.6%, and China H-shares at 4.5%; Japan, Egypt, and the US underperformed by 2.1%, 1.2%, and 0.5%, respectively. South Korea's one-week relative return was 2.2%, while its year-to-date and past-year returns were 57.1% and 100.0%, respectively; Taiwan, China's one-week return was -0.1%, but its year-to-date and past-year returns were 40.6% and 58.7%, respectively. These figures show that the Asian technology-related markets highlighted by the index adjustments had not performed uniformly beforehand, although South Korea and Taiwan, China delivered notable relative performance over longer observation periods. Beyond the rebalancing theme, the report supplements its assessment with a global market dashboard. Its framework includes Goldman Sachs' 3-month, 6-month, and 12-month macro forecasts; comparisons of top-down forecasts for 2026 and 2027 earnings-per-share growth with bottom-up market consensus; bull-bear and risk-appetite indicators; and regional and sector earnings revisions. The earnings section tracks the ratio of upgrades to downgrades over the past month, 3-month revisions, and year-to-date revisions. The valuation section uses 12-month and 24-month forward price-to-earnings ratios and compares regional, sector, and style valuations with their historical ranges over the past 20 years. The report also examines the performance and valuation differences between value and growth, small caps and large caps, cyclicals and defensives, and momentum and the market. The cross-asset section compares US dollar total returns across equities, bonds, and commodities, and uses 3-month rolling correlations of weekly returns to examine linkages between equities and government bonds, equities and foreign exchange, and assets and commodities. The fund-flow section tracks monthly global investor flows into developed-market and emerging-market equity funds, including active and passive funds. It also compares emerging markets with developed markets based on earnings sentiment, premiums or discounts in 12-month forward price-to-earnings ratios, and relative net asset flows. The volatility section focuses on 3-month at-the-money implied volatility, 3-month standardized skew, and the 2027 dividend market and implied dividend yields. The available text does not provide the latest specific readings for these charts, so the principal confirmable conclusion remains the fund-flow advantage for the technology sector resulting from index adjustments. This week's macro events to watch span multiple regions. The US will release the durable goods report and core PCE inflation, while Federal Reserve officials will participate in speaking events, including appearances by President Barkin and Chair Warsh at the Jackson Hole symposium. Europe will focus on French consumer confidence, Germany's IFO business climate, Norwegian mainland GDP, preliminary HICP inflation in France and Spain, Germany's seasonally adjusted unemployment claims rate, and final Euro area consumer confidence. Japan will release Tokyo new core CPI for August. Asia ex-Japan will focus on Singapore CPI, industrial production in Taiwan, China, central bank meetings in South Korea, the Philippines, and Thailand, and South Korea's 2027 budget proposal.

Analysis framework

The report first establishes the market context through one-week regional, sector, and cross-asset performance, then maps constituent and weight changes from the FTSE Russell and Hang Seng index reviews into potential regional and sectoral passive buying and selling demand. It subsequently constructs a top-down global market monitoring framework using macro forecasts, risk sentiment, earnings revisions, forward valuations, style performance, market concentration, cross-asset correlations, and global fund flows, and lists the macro events to monitor in the following week.

Methodology notes

• Event Games and Behavioral FinanceEvent-driven analysis

  Index Review and Rebalancing Event Analysis

  Based on the review results announced by FTSE Russell and Hang Seng Indexes, the report assesses the mechanical passive-fund buying and selling demand that may arise when constituent and weight adjustments are implemented, thereby identifying the affected countries and sectors.

• Event Games and Behavioral FinanceFund Flow/Positioning Analysis

  Tracking Active and Passive Equity Fund Flows

  The report tracks monthly global investor inflows into equity funds by developed markets, emerging markets, and region, distinguishing between active and passive funds to observe the direction of capital allocation.

• Quantitative/Factor/Portfolio Theory

  Cross-Asset Pair-Trade z-Score Method for the Risk-Appetite Indicator

  The report's risk-appetite indicator is based on 27 cross-asset pair trades and calculates z-scores using performance over the past 2 years, measuring current risk appetite relative to recent history on a standardized scale.

• Valuation methodsPE/PEG valuation

  Forward Price-to-Earnings Ratios and Historical Range Comparison

  The report uses 12-month and 24-month forward price-to-earnings ratios and compares the 12-month forward price-to-earnings ratios of regions, sectors, and styles with levels over the past 20 years to assess relative valuation premiums or discounts.

• Event Games and Behavioral FinanceExpectation Gaps/Expectation Management

  Earnings Revisions and Earnings Sentiment

  Earnings sentiment is calculated as the number of earnings forecast upgrades minus downgrades over the past month, divided by the total number of forecasts, and is combined with 3-month and year-to-date EPS revisions to measure the direction of changes in analyst expectations.

Asset mapping & comparison

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

• Technology Hardware and Semiconductors

  Expected to receive one of the largest groups of passive fund inflows in both the FTSE Russell and Hang Seng index reviews.

  Strengths

  Both independent index adjustments point to benefits for the industry, providing consistency in the direction of fund flows.

  Comparison

  The fund-flow outlook is better than for banks, automobiles, utilities, and consumer retail.

• Capital Goods

  Expected to receive strong inflows from the FTSE Russell global equity index adjustments.

  Strengths

  Ranked alongside technology hardware and semiconductors among the sectors expected to receive the strongest inflows.

  Weaknesses

  The Hang Seng index review section did not identify it as a major inflow sector.

  Comparison

  The direction of fund flows under the FTSE Russell adjustments is more favorable than for banks and automobiles.

• Software and Services, Internet and Media

  Expected to receive one of the largest groups of inflows from the Hang Seng index adjustments.

  Strengths

  Together with technology hardware and semiconductors, these comprise the main technology beneficiaries of the Hang Seng adjustments.

  Weaknesses

  The FTSE Russell review summary did not list these two industries separately.

  Comparison

  The direction of fund flows under the Hang Seng adjustments is more favorable than for banks, utilities, and consumer retail.

• Banks

  Identified as a major source of passive fund outflows in both the FTSE Russell and Hang Seng index adjustments.

  Weaknesses

  Both index reviews point to outflows, providing a consistent directional signal.

  Comparison

  Clearly disadvantaged in terms of fund flows relative to technology-related industries.

• Automobiles, Utilities, and Consumer Retail

  Automobiles are expected to be negatively affected by the FTSE Russell adjustments; utilities and consumer retail are expected to be negatively affected by the Hang Seng index adjustments.

  Weaknesses

  All are included among the sector groups expected to experience the largest outflows in the respective index reviews.

  Comparison

  Expected fund-flow performance is weaker than for technology hardware, semiconductors, software services, and internet media.

Key data

• One-Week Performance of the US and Japan-1.5%; -3.3%Market performance for the week ended Friday, August 21
• One-Week Performance of Europe, Emerging Markets, and Asia ex-Japan0.2%; 1.2%; 0.9%All three regions rose
• One-Week Increase in Brent Crude6.1%The report believes this helped the energy sector remain strong
• One-Week Increase in Gold4.6%The report links the increase to US Treasury buybacks
• Asia-Pacific Markets Expected to Receive the Largest Inflows from the FTSE Russell ReviewChina, South Korea, Taiwan, China, IndiaJapan is expected to face stronger selling pressure after the adjustments are implemented
• Markets Leading MSCI AC World in One-Week Relative PerformanceSouth Africa 5.1%; Brazil 4.6%; Hong Kong, China 4.6%; China H-shares 4.5%US dollar price-relative returns, not absolute market returns
• South Korea's Performance Relative to MSCI AC WorldOne week 2.2%; year-to-date 57.1%; past year 100.0%US dollar price-relative returns
• Taiwan, China's Performance Relative to MSCI AC WorldOne week -0.1%; year-to-date 40.6%; past year 58.7%US dollar price-relative returns
• Risk-Appetite Indicator Sample27 cross-asset pair tradesStandardized using z-scores relative to performance over the past 2 years

Impact & implications

The report believes that both index reviews point to stronger passive fund inflows into technology-related industries, implying that technology hardware, semiconductors, software services, and internet media may receive relatively clear mechanical funding support when the index adjustments are implemented. Regionally, China, South Korea, Taiwan, China, and India are expected to benefit more, while Japan faces selling pressure. Banks are on the outflow side in both reviews, indicating that the sector divergence from this rebalancing is not caused by a single index.

What to watch

• Monitor actual passive fund flows and sector rebalancing after the FTSE Russell and Hang Seng index adjustments are implemented.
• In the US, monitor the durable goods report, core PCE inflation, and speeches by Federal Reserve officials.
• In Europe, monitor French consumer confidence, Germany's IFO business climate, Norwegian mainland GDP, preliminary HICP inflation in France and Spain, Germany's unemployment claims rate, and final Euro area consumer confidence.
• In Japan, monitor Tokyo new core CPI for August.
• In Asia ex-Japan, monitor Singapore CPI, industrial production in Taiwan, China, central bank meetings in South Korea, the Philippines, and Thailand, and South Korea's 2027 budget proposal.