Institutional selling weighed on Taiwan, China technology stocks, while high-dividend sectors outperformed amid strong earnings and elevated valuations

Overview

This weekly report reviews the Taiwan, China equity market across market performance, investor fund flows, fund positioning, earnings, valuations, macroeconomic data, and risk indicators. Its core conclusion is that technology stocks and institutional selling weighed on the indices, while high-dividend sectors performed relatively strongly; corporate earnings and export data remained supportive, although valuations, TSMC position concentration, and the cross-Strait risk indicator posed constraints.

Core views

Regarding market performance, the report title summarizes the TAIEX decline as approximately 1%, while the body shows that the TAIEX and MXTW fell 1.3% and 1.6%, respectively, for the week, underperforming MXAPJ by 2.4 percentage points. Sector divergence was pronounced: transportation rose approximately 15%, energy approximately 7%, and telecommunications and consumer staples approximately 2% to 3%; technology hardware and semiconductors excluding TSMC fell 4% to 5%. TSMC bucked the trend with a 0.6% gain, directionally consistent with the approximately 1% increase cited in the title, while high-dividend stocks also outperformed. In foreign exchange, the TWD appreciated 0.5% against the USD to 31.9. Weekly fund flows reflected institutional reductions in technology exposure. Foreign institutions net sold US$1.1 billion of technology stocks excluding TSMC but purchased US$0.9 billion of industrial stocks and US$0.3 billion of other non-technology sectors; their futures short positions also decreased by US$1.9 billion. Local funds net sold US$1.1 billion, with selling concentrated in technology stocks, while increasing financial holdings. Retail investors were net buyers of cash equities and increased their margin-financing ratio but sold futures and ETFs; the market's aggregate securities lending balance declined further. ETF flows remained negative, with Taiwan, China-related ETFs recording aggregate net outflows of US$0.4 billion for the week. Active ETFs saw outflows of US$0.9 billion and leveraged ETFs saw outflows of US$0.4 billion, while broad-market products attracted US$0.5 billion and dividend products attracted US$0.4 billion. This structure corroborates the relative outperformance of high-dividend stocks, indicating that aggregate flows remained weak but capital was being significantly reallocated across styles. Over a longer horizon, institutional positioning pressure remained concentrated in TSMC. Foreign institutions have net sold US$40 billion of Taiwan, China equities year to date, including US$51 billion of net selling in TSMC; between June and July, foreign institutions largely reversed the cumulative US$22 billion purchased in April and May. Goldman Sachs Prime Services data show that hedge funds also reversed their prior purchases of the Taiwan, China market over the past two months, with both long and short selling. Among long-only investors, emerging-market and Asia ex-Japan mutual funds significantly reduced their Taiwan, China exposure in July, while global fund positioning remained relatively stable. Regional funds currently allocate 12.1% of their portfolios to TSMC, below TSMC's 15.6% weight in the emerging-market benchmark, a gap of 350 basis points. Despite the existing relative underweight, the report still believes concentration limits could lead to further selling pressure, indicating that absolute single-stock exposure constraints in fund portfolios may matter more than relative benchmark weights. Fundamental data were markedly stronger than the market's weekly performance. Earnings of Taiwan, China companies in the second quarter of 2026 are currently up 176% year over year and 51% quarter over quarter; 49% of companies beat earnings expectations, while 38% missed, with median earnings and sales beats of 14% and 4%, respectively. Listed-company revenue increased 50% year over year in July, slightly below 52% in June, but had already reached 34% of the third-quarter consensus revenue forecast, above the historical average of 32% for the same period. Consensus 2027 earnings per share estimates were revised upward by 0.3%, with positive revisions primarily from transportation and technology hardware. Regarding valuation, the market's 12-month and 24-month forward P/E ratios were 18.9x and 14.7x, respectively, standing 1.6 and 0.7 standard deviations above their historical averages and indicating elevated near-term valuations. The TSMC ADR premium declined to 11%, while the Goldman Sachs ADR Premium Reversal Index GSSRTSMR stood at -0.4, which the report interpreted as indicating a potential rebound. The model uses historical average SHAP values to evaluate each feature's contribution to the reversal index. Macroeconomic and risk indicators provided additional context. Export orders increased 61.9% year over year, above June's 59.4%, showing that external demand growth remained strong; meanwhile, the cross-Strait risk index GSSRCSRl rose to 83. The next data points listed for monitoring include M2 on Monday, industrial production and retail sales on Tuesday, and consumer confidence on Thursday.

Analysis framework

The report first compares the weekly performance of Taiwan, China indices, industries, styles, and the exchange rate, and then breaks down flows from foreign institutions, local funds, retail investors, futures, and ETFs. It subsequently combines short-term flows with year-to-date fund flows, hedge-fund trading, and mutual-fund positioning to assess positioning pressure on TSMC and the broader market. The fundamental analysis uses FactSet bottom-up consensus estimates to examine second-quarter earnings surprises, monthly revenue progress, and EPS revisions; finally, forward P/E ratios, the ADR premium reversal model, risk indices, and macroeconomic data provide additional valuation and risk context.

Methodology notes

• Event-Driven Strategies and Behavioral FinanceFund Flow/Positioning Analysis

  Breaking down fund flows and positioning by investor and product type

  The report separately examines foreign institutions, local funds, retail investors, hedge funds, mutual funds, futures, and ETFs to determine which investors are driving selling pressure and toward which sectors and styles capital is shifting.

• Valuation methodsPE/PEG valuation

  Forward P/E ratios compared with historical standard deviations

  The report compares 12-month and 24-month forward P/E ratios with their respective historical distributions and uses the number of standard deviations above the historical mean to indicate current valuation levels.

• Quantitative/Factor/Portfolio TheoryStyle factor analysis

  Long-short portfolios based on Taiwan, China equity style factors

  The report ranks MSCI Taiwan constituents by each factor metric, selects stocks in the highest and lowest quartiles to construct equal-weighted portfolios, and rebalances them quarterly to compare the relative performance of styles such as price momentum and size.

• Corporate Fundamentals and Financial Framework

  Tracking earnings surprises, EPS revisions, and monthly revenue progress

  The report compares actual earnings and sales with consensus forecasts and combines the direction of EPS revisions with monthly revenue as a proportion of quarterly forecasts to assess fundamental delivery and changes in expectations.

• Quantitative/Factor/Portfolio Theory

  TSMC ADR Premium Reversal Index and SHAP feature contributions

  GSSRTSMR is used to assess the potential reversal direction of the TSMC ADR premium; the report uses historical average SHAP values to explain the positive or negative contributions of different model features to the latest index reading.

Asset mapping & comparison

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

• Taiwan, China Equity Market (TAIEX/MXTW)

  The indices were weighed down by technology stocks and selling by foreign and local institutions, but corporate earnings, export orders, and monthly revenue continued to grow rapidly.

  Strengths

  Second-quarter 2026 earnings increased 176% year over year and 51% quarter over quarter, while export orders increased 61.9% year over year.

  Weaknesses

  The TAIEX and MXTW fell 1.3% and 1.6%, respectively, while the 12-month forward P/E ratio stood 1.6 standard deviations above its historical average.

  Comparison

  Underperformed MXAPJ by 2.4 percentage points for the week.

  Risks

  The cross-Strait risk index rose to 83, while institutional fund flows remained weak.

• TSMC

  TSMC rose against the trend during the week but remained the principal source of foreign institutional selling year to date and was affected by fund concentration constraints.

  Strengths

  The share price rose 0.6% for the week, while semiconductors excluding TSMC fell 4% to 5%; the ADR premium reversal index indicated a potential rebound.

  Weaknesses

  Foreign institutions have net sold US$51 billion of TSMC year to date, while the ADR premium declined to 11%.

  Comparison

  Regional funds held a 12.1% weight, 350 basis points below its 15.6% weight in the emerging-market benchmark.

  Risks

  The report believes concentration limits could still result in further selling.

• Technology hardware and semiconductors excluding TSMC

  This segment was the primary source of institutional selling and market declines during the week.

  Strengths

  Technology hardware was among the industries with the most concentrated positive revisions to 2027 consensus EPS.

  Weaknesses

  Technology hardware and semiconductors excluding TSMC fell 4% to 5% for the week, while foreign institutions net sold US$1.1 billion of technology stocks excluding TSMC.

  Comparison

  Underperformed TSMC, which rose 0.6%, as well as the leading transportation and energy sectors.

• High-dividend stocks and dividend ETFs

  Against a backdrop of overall market weakness and net ETF outflows, high-dividend stocks performed relatively strongly, while dividend products attracted net inflows.

  Strengths

  Dividend ETFs recorded weekly net inflows of US$0.4 billion, while high-dividend stocks outperformed.

  Comparison

  Over the same period, active and leveraged ETFs recorded net outflows of US$0.9 billion and US$0.4 billion, respectively.

Key data

• TAIEX/MXTW weekly performance-1.3%/-1.6%Underperformed MXAPJ by 2.4 percentage points
• TSMC weekly performance+0.6%Rose against the trend while semiconductors excluding TSMC and technology hardware fell 4% to 5%
• TWD against the USD31.9Appreciated 0.5% for the week
• Weekly foreign institutional flows in technology stocks excluding TSMC-US$1.1bnAlso purchased US$0.9bn of industrial stocks and US$0.3bn of other non-technology stocks
• Weekly local fund flows-US$1.1bnPrimarily sold technology stocks while purchasing financial stocks
• Weekly flows in Taiwan, China-related ETFs-US$0.4bnActive and leveraged products recorded outflows of US$0.9bn and US$0.4bn, respectively, while broad-market and dividend products attracted inflows of US$0.5bn and US$0.4bn, respectively
• Year-to-date foreign institutional flows in Taiwan, China equities-US$40bnTSMC contributed -US$51bn
• TSMC weight in regional funds12.1%350 basis points below its 15.6% weight in the emerging-market benchmark
• Second-quarter 2026 earnings growth+176% YoY/+51% QoQ49% beat expectations and 38% missed expectations
• Median second-quarter earnings/sales beat+14%/+4%Relative to consensus forecasts
• July listed-company revenue growth+50% YoYJune was +52%; revenue had reached 34% of the third-quarter consensus forecast, above the historical average of 32%
• 2027 consensus EPS revisions+0.3%Positive revisions primarily came from transportation and technology hardware
• 12-month/24-month forward P/E ratios18.9x/14.7x1.6/0.7 standard deviations above their historical averages, respectively
• TSMC ADR premium11%GSSRTSMR stood at -0.4, and the report identified a potential rebound
• Cross-Strait risk index83The latest GSSRCSRl reading increased
• Export order growth+61.9% YoYJune was +59.4%

Impact & implications

The report believes that strong second-quarter earnings, export orders, and monthly revenue progress provide fundamental support for the market, but these factors have not yet offset the short-term pressure from institutional reductions in technology stocks and TSMC. Capital has shifted away from active, leveraged, and technology exposure toward broad-market and dividend products, creating pronounced style divergence; meanwhile, elevated near-term P/E ratios, TSMC concentration constraints, and the rising cross-Strait risk indicator limit the degree of optimism in the overall assessment.

Risks

• The cross-Strait risk index GSSRCSRl rose to 83, indicating an increase in the related risk indicator tracked by the report.
• Regional funds' absolute exposure to TSMC may still be constrained by concentration limits, which the report believes could trigger further selling.

What to watch

• Monitor the M2 data released on Monday.
• Monitor the industrial production and retail sales data released on Tuesday.
• Monitor the consumer confidence data released on Thursday.