Asian equity market outlook and allocation Report Interpretation

Overview

Goldman Sachs' Asia-Pacific strategy report argues that the third-quarter correction and market rotation have created a more balanced entry point for Asian equities. Its constructive view rests on supportive macro conditions, unusually strong technology-driven earnings, generally compelling valuations and a reset in investor positioning, while near-term volatility may persist ahead of the US midterm elections.

Core views

After a strong first-half rally, the Asia-Pacific regional index corrected in the third quarter, with Korea suffering the largest pullback after leading in the first half and China, India and Indonesia rebounding as leadership moved away from AI technology hardware. Goldman Sachs characterizes the market as being at a tentative juncture: rebounds have not yet confirmed renewed uptrends, but the regional index has returned to the middle of its trend channel. The institution nonetheless expects the index to break out of its trading range once risk appetite rebuilds. The first pillar is macro. Goldman Sachs expects global GDP growth to improve from 2.5% in 2026 to 2.8% in 2027. It sees Asia-Pacific monetary tightening as moderate rather than growth-threatening, and expects two Federal Reserve rate cuts in 2027, which it believes should reduce pressure on regional central banks. The report also expects moderate Asian currency appreciation against the US dollar over the next 12 months, historically supportive for Asian equities, and Brent crude to moderate from the high-US$80s per barrel to US$75 per barrel in 2027. Earnings are the report's strongest support for the regional view. Goldman Sachs again raises its profit-growth forecasts and projects 2026 and 2027 EPS growth of 350% and 35% for Korea, and 62% and 30% for Taiwan. It forecasts regional MXAPJ earnings growth of 72% in 2026 and 23% in 2027, with Japan's FY2026 forecast raised to 19% from 13% after strong first-quarter FY2026 results. The report's earnings-revision lead indicator continues to signal moderate upgrades. In a longer-term comparison, regional earnings grew only 6% annually from 2011 to 2025, while Goldman Sachs expects a 34% CAGR for 2026-2028 even if growth moderates to 13% in 2028. Valuation supports a differentiated, rather than uniform, allocation. The MXAPJ index trades at 11.1x 12-month forward P/E, described as two standard deviations below normal, and 2.6x P/B despite a record-high 19.9% ROE. Korea trades at only 5x forward earnings; Indonesia and the Philippines trade at 9-10x, and offshore China at 12x. India, Australia, Taiwan, Japan and Singapore trade around 18-20x forward earnings and are expensive both absolutely and versus their historical ranges. Goldman Sachs therefore also assesses markets on a P/E-to-growth basis and finds regional valuations generally compelling on absolute and z-score PEG measures. Positioning has become less extended after the pullback. Exchange data show more than US$170 billion of year-to-date net foreign selling across eight emerging Asian markets excluding China, led by Korea and including substantial selling in Taiwan and India. Active EM/Asia ex-Japan funds are underweight Taiwan, India and Korea; hedge-fund allocations to Japan, Korea, Taiwan and China have declined to mid-range levels; and Korea leveraged ETF assets and dealer procyclical hedging have fallen 50-70% from late-June peaks. Goldman Sachs views this combination as a cleaner and more balanced risk-appetite backdrop than at the end of the first half. For the index path, Goldman Sachs raises its 12-month MXAPJ target by 4% to 1,120 from 1,080, based on higher earnings and a lower target P/E of 11.9x versus 12.2x previously. The target implies 26% USD price return and 28% USD total return; excluding Korea and Taiwan, the forecasts imply 8% price return and 11% total return. The 3-month and 6-month targets are 960 and 1,040, respectively, with the 3-month target reduced for US-election uncertainty and a potential late-fourth-quarter rally. The report's historical analysis finds Asian markets generally range-bound in the two months before US midterms and stronger in the following three months. Goldman Sachs maintains overweight positions in Korea, Taiwan, Japan and China A-shares, funded by underweights in Australia and parts of ASEAN. It favors technology hardware and semiconductors, capital goods, banks excluding Australia and China, and healthcare; it funds these exposures with underweights in autos, software and defensives. Korea is favored for an AI hardware and memory cycle that Goldman Sachs expects to be stronger and longer than prior cycles amid accelerating compute demand and shortages potentially extending to 2030, cleaner positioning, non-memory growth and a 5x forward P/E alongside 2026-2028 earnings growth forecasts of 350%/35%/20%. Taiwan shares much of the hardware exposure but at a higher valuation. Japan is supported by domestic reflation, defense, the AI supply chain and corporate reform. China A-shares are supported by 17% year-on-year second-quarter 2026 earnings growth, favored sector weights and improving shareholder returns; the report remains overweight A-shares and market weight offshore China while selectively favoring H-share internet/soft tech and healthcare. It sees stabilizing macro activity and earnings in India, but remains cautious on Australia and sees subdued prospects in Indonesia, the Philippines and Thailand. The report highlights improved entry points after the third-quarter pullback for AI-generated-content semiconductors, aerospace and defense, energy security, HALO assets and high shareholder yield. It also presents screens for low-PEG AI hardware shares and Goldman Sachs Buy-rated companies with high shareholder returns, free-cash-flow yields and positive earnings revisions. For Korea, Japan and China, it outlines derivatives intended for downside protection or upside participation; these include zero-cost Korean put-spread collars and put-funded call spreads, lower-premium European options in Japan, and China A-share swap structures.

Analysis framework

Goldman Sachs builds its regional view through four linked pillars: macro conditions, earnings forecasts and revision signals, valuation relative to growth, and investor positioning. It then translates that assessment into index targets, country and sector allocations, thematic screens and derivative structures, while testing near-term risks through historical midterm-election patterns and a five-factor model of market sensitivity to US real rates.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Forward P/E, P/B and PEG comparisons, including historical z-scores

  The report compares each market's earnings multiple and price-to-book ratio with growth and historical ranges to distinguish relatively attractive markets from expensive ones.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  AI technology hardware supply-chain analysis

  Goldman Sachs links accelerating compute demand and memory shortages to earnings growth in Korean and Taiwanese semiconductor and hardware supply-chain markets.

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Five-factor model of MXAPJ market sensitivity

  The report models three-month USD market returns against changes in China and US activity indicators, US real rates, commodities and geopolitical risk to assess rate sensitivity.

• Event-Driven and Behavioral FinanceEvent-driven analysis

  Historical market behavior around US midterm elections

  The report compares pre- and post-midterm equity-market performance to frame the expected near-term range trading and potential later rally.

Asset mapping & comparison

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

• MXAPJ Index

  Regional benchmark for Goldman Sachs' constructive Asia-Pacific equity outlook and target framework.

  Strengths

  Forecast 72% EPS growth in 2026 and 23% in 2027; 11.1x forward P/E; cleaner positioning.

  Weaknesses

  Near-term uncertainty around US elections and uneven market leadership.

  Comparison

  Excluding Korea and Taiwan, implied 12-month price return falls to 8% versus 26% for MXAPJ overall.

  Risks

  Higher US bond yields, geopolitical escalation and election-related volatility.

• Korea

  Overweight market and a principal driver of regional expected returns.

  Strengths

  AI hardware and memory-cycle exposure, cleaner positioning, 350%/35%/20% 2026-2028 earnings growth forecast and 5x forward P/E.

  Weaknesses

  High volatility and a sharp third-quarter pullback.

  Comparison

  Expected regional returns are led by Korea and Taiwan; Korea trades at a lower valuation than Taiwan.

  Risks

  A rise in US yields would be challenging; technology-cycle assumptions may not be realized.

• Taiwan

  Overweight market with deep listed hardware and semiconductor supply-chain exposure.

  Strengths

  62% 2026 and 30% 2027 EPS growth forecast and exposure to AI hardware demand.

  Weaknesses

  Higher valuation than Korea.

  Comparison

  Shares many of Korea's technology-cycle drivers but trades at a higher valuation.

  Risks

  Higher US yields and market volatility.

• Japan

  Overweight market supported by thematic opportunities.

  Strengths

  FY2026 earnings-growth forecast raised to 19% from 13%; domestic reflation, defense, AI supply chain and corporate reform.

  Weaknesses

  Forward earnings valuation is roughly 18-20x, high versus historical ranges.

  Comparison

  Goldman Sachs favors Japan alongside Korea, Taiwan and China A-shares rather than Australia and much of ASEAN.

  Risks

  Higher US rates and broader risk-off conditions.

• China A-shares

  Overweight market within the North Asia allocation.

  Strengths

  17% year-on-year earnings growth in 2Q26, favored thematic weights and improving shareholder returns.

  Comparison

  Goldman Sachs is overweight A-shares but market weight offshore China, while selectively adding H-share exposure.

  Risks

  Geopolitical and policy uncertainty.

Key data

• MXAPJ 12-month target1,120Raised 4% from 1,080; based on higher earnings and an 11.9x target P/E.
• MXAPJ implied return26% USD price return; 28% USD total return12-month forecast; excluding Korea and Taiwan, implied price and total returns are 8% and 11%.
• Regional EPS growth72% in 2026; 23% in 2027Goldman Sachs forecasts for MXAPJ.
• Korea EPS growth350% in 2026; 35% in 2027Driven by technology hardware exposure.
• Taiwan EPS growth62% in 2026; 30% in 2027Driven by technology hardware exposure.
• MXAPJ valuation11.1x 12-month forward P/E; 2.6x P/B; 19.9% ROEThe P/E is described as two standard deviations below normal.
• Foreign investor flowsMore than US$170bn YTD net sellingAcross eight emerging Asian markets excluding China.
• US 10-year yield risk level5%A move to or through this level would be challenging, particularly for longer-duration sectors.

Impact & implications

Goldman Sachs expects technology-led earnings, relatively attractive growth-adjusted valuations and cleaner positioning to support Asian equity gains over 12 months, led by Korea and Taiwan. It nevertheless expects near-term uncertainty around the US midterms and advises that country, sector and implementation choices should remain differentiated because valuations, earnings and risks vary widely across markets.

Risks

• US midterm elections on November 3 could raise policy uncertainty and market volatility before the vote.
• A move in the US 10-year Treasury yield to or through 5% would be challenging for Asian markets, particularly longer-duration sectors.
• A resurgence in Middle East or other geopolitical tensions could expose complacent equity markets to volatility.
• Australia faces soft earnings growth and elevated valuations; Indonesia, the Philippines and Thailand face combinations of low earnings growth, valuation, liquidity and index free-float overhangs.

What to watch

• Corporate earnings results through the third-quarter reporting season.
• Central-bank policy meetings, including FOMC and Bank of Japan meetings.
• US midterm elections on November 3 and subsequent policy uncertainty.
• US Treasury yields, particularly whether the 10-year yield approaches or exceeds 5%.
• Geopolitical developments, capital-market activity and key China-US policy events.