Interview, Earnings Call
Can the Asia Equity Rally Continue?
- The recent Trump-Xi summit resulted in "no harm done," a neutral outcome classified as the middle tier of U.S.-China diplomatic engagements, which markets viewed as a relief given low pre-summit expectations.
- Chinese equity markets show a widening performance gap: onshore A-shares are up nearly 10% year-to-date, while the offshore MSCI China Index is down 2%.
- Goldman Sachs has revised its consensus earnings growth forecast for Chinese A-shares upward from 16% to 25%, driven by China exiting a three-year deflationary period with the Producer Price Index (PPI) turning positive at 2.8% for two consecutive months.
- H-shares continue to underperform A-shares due to weak earnings from heavyweight internet application companies (Tencent, Alibaba) which comprise 25% of the MSCI China Index, despite a sub-surface bull market in small-cap tech sectors (semiconductors, biotech) where the KSTAR index is up 20% year-to-date.
- Global investor sentiment regarding China has recovered from "uninvestable" lows to the 40th percentile, with hedge funds and mutual funds holding mid-range net exposure despite valuations appearing expensive relative to recent returns.
- North Asian markets (Korea, Taiwan, Japan) have significantly outperformed South Asia due to insulation from energy supply shocks; Korea's GDP was cut only 0.1 percentage points compared to a 1.5 percentage point reduction for the Philippines.
- The North Asia outperformance is driven by two axes: protection from energy price volatility and heavy concentration in the AI trade, with Taiwan's market 80% tech-oriented, Korea 50-60%, and Japan 30%.
- Goldman Sachs expects the current semiconductor memory supercycle to last three to five years, citing a projected 24x increase in token usage for agentic AI by 2030, creating sustained supply shortages and pricing power.
- Despite a long-term constructive view, Korean memory stocks (Samsung, SK Hynix) are considered tactically overbought with a Relative Strength Index (RSI) of 85 and year-to-date gains exceeding 200%, prompting strategies to hedge near-term downside.
- Market concentration remains a risk, particularly in Korea where memory stocks drove 269% consensus profit growth; however, stripping memory out, the broader Korean market still shows over 40% earnings growth supported by shipbuilding, defense, and corporate governance reforms.
- Japan is overweight at Goldman Sachs based on four pillars: political stability following the February 8th election, 10% earnings growth with upside from yen translation, normalization of interest rates benefiting banks, and flow dynamics from domestic investors utilizing NISA tax-advantaged accounts.
- The Nikkei has surged 20% year-to-date compared to the Topix's 8%, reflecting a rotation toward tech and AI themes, while the Nikkei/Topix ratio has reached an all-time high.
- Investors globally hold misconceptions regarding the sustainability of the semiconductor cycle and the extent of structural corporate governance improvements in Asia, specifically the adoption of stock buybacks and rising dividend payout ratios.
- Key risks to North Asia's sustained outperformance include a prolonged Middle East conflict disrupting energy supplies beyond six weeks, which could trigger a summer correction, and potential new disruptions in the tech supply chain.
- Goldman Sachs recorded this discussion on Monday, May 18, 2026, noting that while the base case remains constructive, markets are vulnerable to short-term pullbacks given their stretched valuations.