Can the Asia Equity Rally Continue?

[MUSIC] From the Trumpshi meeting in China to the global race for advanced semiconductors, North Asia is increasingly at the center of both geopolitics and markets. So what's driving the region's momentum and can it continue? Welcome to exchanges, the weekly show where I find out how we here at Goldman Sachs are making sense of the most consequential events impacting economies and markets. I'm Al Senathe. [MUSIC] My guest today is Tim Mo, Chief Asia Pacific Regional Equity Strategist and Co-Head of Macro Research in Asia in Goldman Sachs Research. We'll be discussing the implications of the Trumpshi meeting, the semiconductor chip shortage, and the broader forces shaping markets across North Asia. Tim, welcome to exchanges. Well, thank you so much for having me. So Tim, let's start with last week's much anticipated summit between President Trump and China's President Xi Jinping. What stood out most to you from those discussions? I think the key takeaway is that it appears no harm was done. I know that sounds like a very low bar, but if you want to classify the various presidential meetings, US presidential meetings with Chinese counterparts, there's an accepted scholarly classification structure of six different levels ranging from most positive and consequential to most negative. And this was in the middle with not really a lot of major change, but it gets the background of tension duplicatively globally and concern over US and China friction. Just having calm in the relationship, I think was appreciated and desired by both sides. And I think from a market perspective, where expectations were low going into it, that this is at least a welcome outcome that no harm was done. So that isn't encouraging takeaway. I think no harm done. I like that, Tim, and the way you put it. If we think about the Chinese equity markets, they have struggled to sustain momentum, despite some periodic support measures. And we have seen many rallies. We just got another set of economic data out of China. It wasn't particularly encouraging. What do you think global investors will need to see before confidence in China can really meaningfully improve? So I think there's really three key points to make here within the ever complicated Chinese equity spectrum. The first is that there's a really big difference between onshore A-share equities and offshore commonly known shares. And if you look at the performance this year, A has outperformed pretty meaningfully. It's up close to 10% year to date, whereas the MSEI China index, which is our favorite measure of offshore equity performance, is down 2% year to date. So there's a decent spray between those two. We've been much more positive than A and happily so for a few key reasons, which in brief would be one that there's very clear policy support for the structural strategic development of the equity market. And I was in Beijing about six weeks ago visiting the regulators there and the message from them is consistently constructive and along the lines I just mentioned. Number two with our bits, the road is earnings and the consensus numbers for A shares have gone from 16 to 25% for this year. We're a bit lighter at 20, but still we've raised our numbers. And this was a reflection that China has come out of over three years of deflation measured by the PPI, the producer price index. And that's gone positive for two consecutive months. The most recent reading being 2.8%, which is above consensus. And the reason why that's important is that more of the industry structure of the A shares is concentrated in upstream manufacturing oriented sectors, which much were sensitive to produce surprises. So when you come out of deflation, that is something which gives a tailwind to earnings. That's been reflected in terms of both what's been reported for the first quarter and also analyst expectations. Now in contrast to that, the A shares are more dominated by the internet application area that the sort of the softer end of the spectrum of the AI trade. And that is something which has been languishing partly because the attention has been more an upstream hardware, which I'm sure we'll get to later in the conversation, but also because the heavyweight stocks have been producing frankly poor earnings. And so I think really the story here is one of a better than expected earnings delivery for onshore and subpar earnings delivery for offshore. And I think that helps explain the spread to a significant degree. And what the last point I'll make is that within the offshore index, there's actually a bull market going on underneath the surface. So here's the key statistic. 37% of the MSI China index is in those internet software oriented companies that I mentioned. 25% of that is 10 cent Nalibaba and there's a number of others which make up the rest. But beneath that, there's a bull market going on in some sectors in biotech, in low-worth orbit satellites, space trade, in robotics, etc. But there's still small enough caps that they're not really picked up whether overshadowed by the larger part of the index. So last point, if you look at, for example, the K-star index, which is the onshore, smaller, higher growth, small cap companies, more tech-oriented companies, or the equivalent offshore, you'll see that's up 20% here today. So you've got really a number of different China's within the whole China universe. And I think the trick for investors is how to know which part of that to focus on at any particular time. That's an interesting point you make, Tim, because China is one country where more inflation is actually received positively as you explained. But when you think about this though, you said China complicated market, if you were going to think about overall sentiment right now, we have seen it very low on China in recent years, we've seen it much higher on China. Where would you put investor sentiment at this point? I'd say pretty much mid-range, maybe or the 40th percentile around there. And I can say that with some degree of confidence because a number one, we've got very good higher frequency metrics in terms of hedge fund positioning, both gross and net, and also mutual fund positioning. And hedge funds are at roughly around the 40th percentile, obviously jumps around for me to week, but around that level in terms of net exposure, where exposure to Japan, Korea, Taiwan is like at the 100 percentile. So I think that people are more dialed in there. But it's not as low as the single digit levels that we saw a few years ago when China's uninvestable was the mantra of the day. And in addition, I was just recently seeing investors in Europe and the United States. And really the conversations, there was no mention of China being uninvestable. There, in fact, without solicitation, I heard many investors say, "Hey, look, China looks really attractive, but I'm a bit frustrated because how come it's not doing better?" So I think that the general sense is that China's lag, the value of reasons look inexpensive, it feels like it should be doing better if it's been held back a bit. And I think that part of the reasons that I mentioned in terms of the index decomposition and the lack of earnings delivery for some key parts of the market helps to explain that disconnect. You mentioned the very positive sentiment in some other North Asia markets. And ultimately, that ties to their outperformance so far this year. I want to drill down into that, but before we get into some specific markets, obviously we do have this war ongoing in the Middle East, geopolitical tensions globally are quite high. If we think about how the war is affecting markets and economies in North Asia, where do you see the biggest vulnerabilities and how they have been faring today? So I think a really handy way to understand how market trading and why they've performed in the way they have with this massive upperformance in some North Asia markets versus South Asia is that there are two main axes that markets are trading. One is the energy supply shock and the other is orthogonal to that, which is the tech trade AI boom, which is going on. Now, North Asia is basically more instantated so far from the energy shock, not because North Asia doesn't import lots of energy oil and that gas, but because two reasons basically. They have greater buffer stocks. Number one, and number two, they're breaking the richer and they can afford to pay higher price for whatever supplies available. In contrast, South Asia has much fewer buffers and doesn't have the ability to fiscally offset the pass-through of higher energy prices to the economies so we see a much more direct shock. So for example, we've taken our Philippines GDP numbers down by 100%, but we only cut China's by 10 basis points. So the first point is that North Asia so far has been more insulated from the energy shock. That may not last forever and ever, but for the time being that really explains that dynamic. And then of course, North Asia is where all the AI focus is 80% of time once market is tech-oriented with some way in which touching AI in some quantifiable shape reform. For Korea, that number is about 50 to 60% of the index. Japan is a little bit lower, maybe 30% but you really have this AI trade and the best performing markets are Korea and Taiwan. Korea is up over 80% year to date. Indonesia, South Asia, no tech and lots of energy vulnerability is down 25%. So you've got 100% spread year to date between two markets with Indonesia and I think this sort of these two axes I just mentioned handily explained why that has been the case. It's really pretty fascinating this divergence that we have seen playing out, but for good reasons as you just said, but are there concerns that the markets may be extrapolating current demand trends for memory chips, which has been actually drivers so far, extrapolating too much into the future, and ultimately that's not sustainable. So there's two things I'd say and this is really the crux of all the conversations I've been having with investors really around the world. And so there's good news and bad news. I say the good news, at least from our perspective, is that even though stocks have done fantastically and earnings have been printed and so forth, we think that this is a unique super cycle, which is going to last a lot longer than your conventional memory cycle for lots of reasons, but just to call out one thing which are US semiconductor analyst colleagues just published on a week or so ago. And that is that if you look at token demand as the agentic AI economy scales, we're looking for 24 times increase in token usage between now and 2030. That's a phenomenal number. With that sort of acceleration and demand and a step function increase as you transit from the inference AI economy to the agenteic AI economy, supply is just not going to be able to keep up with that. Therefore, that says to us that if you're in an extended period of supply running short of demand, that means you've got high pricing power and in an industry which is very high degree of operating leverage, that pricing power goes to the bottom line and that explains why you've had this explosion in profits and profitability for the memory stocks and very much the supply chain. The good news here is we think that lasts longer than the market is currently expecting. A good way to quantify that is that for example the green semi-stock, Samsung and high-necks are trading at about five to six times this year's earnings and about four times next year's. That implicitly says that the market really doesn't believe that profitability can last for very long. Now, if we're right that it's going to last for three to five years, then there's still further upside in the stocks on a strategic kind of a trended basis. So that's the good news. I'd say that more challenging news is more the tactical outlook here. These stocks have appreciated 200% or more year-to-date. The relative straight-thin decks, which is one measure of share price momentum, which is recent 85, which is very overbought. So we've been very aware that stock prices don't go up in straight line with ball annualizing about 60%. A correction is certainly overdue and we saw that just late last weekend where there was some concerns about a strike for Samsung. But the key point is that when the stock started that hot, they're going to sell off on almost anything that happens. They'll just be convening excuse for some fast money to take profit. So we've been very focused on how to hedge downside in the short term and this derivative over raise, which up here very attractively priced right now, which can do that, but as a way of staying in the trade for the longer run. So that's how we square the circle in terms of the short term view versus the long term constructive strategic one. And besides the fact that you have this tremendous performance, so it does look overbought, as you just said, at the end of the day, you have extreme concentration in some of these indices. Is that in itself a reason to be concerned that you're just really leveraged to a handful of companies here? I say the answer is yes, but obviously if you're dependent on, or more dependent on a small number of companies, versus say a larger swap, which are in different industries, and that naturally gives you some more diversification, then it's very hard to argue that's not more risky than the broader array of things. But I would say a couple of things. One is that this is not a new phenomenon. I mean, if you take Taiwan, for example, which is outperformed globally, at least the fourth year in a row, Taiwan is outperformed. TSMC is like, you know, Mag 1. I mean, US is Mag 7. Taiwan is Mag 1. TSMC is 55% of the MSI Taiwan index, and 40%, 45% of the broader TWC index. And it's been that way for a while. But that hasn't stopped Taiwan from performing exceptionally well, as I said, a number of years in a row. So yes, I think we have to acknowledge the risk and maybe try to work around it. We've got some various ways which we suggest investors can do. But that sort of just is what it is. Now in Korea's case, with the significant up performance of the two memory stocks, the market has become more concentrated from where it was before. But the one point we will note is that if you strip the extraordinary profit growth this year, where it consensus that 269% profit growth, 269, we're at 300. If you strip the memory stocks out of those numbers, the rest of the market is still growing over 40%. And that's because you've got attractive themes going on. And these are all areas we like. In shipbuilding, power equipment, defense spending, you've got cake culture, you've got the bottom up, improving corporate governance. So there are other things going on in Korea which I think give you a little bit more diversification. But to be clear, if something happens to the memory space, all of Korea is going down because it's just done so well and there's some error that they can be led out of the tire. So I do think you're right that there is concentration risk. But for the time being, given our constructive fundamental view, which I've been mentioning, we still want to stick with the trade. And we've got, we still got appreciable upside to our 12 month targets. So far Tim, we've been really focusing on Korea, Taiwan, and of course our China discussion. But Japan has also been a major investor story over the last couple of years. It's like almost like Korean Taiwan has edged Japan out of the spotlight. But if we think about where Japan is right now, is it attractive from evaluation and positioning perspective or is a lot of that priced in? How are you thinking about Japan? So we're also overweight Japan. We basically have had a North Asia emphasis in our views. And Japan is one of the markets we're overweight. Now it's not going to go up as much as Korea, you don't have the same underlying earnings growth and it's not coming off as low evaluation base. But we're still quite constructive. We're still talking about the market. And we're talking about the market. perform in the distance duration, then you start getting convex negative impacts in terms of energy availability, energy pricing, and all the downstream cascade, sort of supply chain cascade through petrochemicals, food, et cetera. And with markets generally being up relative to February 27th, which is a closing high before the start of the Iran War, and investors feeling pretty good about things, then there could be a root awakening that, oh, actually, this energy supply shock is really not going to hit because markets being forward looking, you've kind of looked through it and sort of assume, look, it's over, we don't exactly when, but we're going to look past that, which is understandable, but if the actual end doesn't come, let's quickly as markets have assumed, then I think we could be set up for some kind of correction in the summer months. So that is definitely something which we're watching carefully. I think we are watching that more bodily, of course, allies are on this war and how it's going to develop. Thanks so much, Tim, for joining us at What is a very late hour in your region. We really appreciate it. Thank you so much for having me. This episode of Goldman Sachs East Angels was recorded on Monday, May 18th, 2026. I'm Allison Nathan. Thanks for listening. The opinions and views expressed herein are as of the date of publication, subject to change without notice, and may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The material provided is intended for informational purposes only, and does not constitute investment advice, a recommendation from any Goldman Sachs entity to take any particular action, or an offer or solicitation to purchase or sell any securities or financial products. This material may contain forward-looking statements. Past performance is not indicative of future results. Neither Goldman Sachs nor any of its affiliates make any representations or warranties, expressed or implied as to the accuracy or completeness of the statements or information contained herein, and disclaim any liability whatsoever for reliance on such information for any purpose. Each name of a third-party organization mentioned is the property of the company to which it relates, is used here strictly for informational and identification purposes only, and is not used to imply any ownership or license rights between any such company and Goldman Sachs. A transcript is provided for convenience and may differ from the original video or audio content. Goldman Sachs is not responsible for any errors in the transcript. This material should not be copied, distributed, published, or reproduced in whole or in part, or disclosed by any recipient to any other person without the expressed written consent of Goldman Sachs. Disclosure is applicable to research with respect to issuers. If any, mentioned herein are available through your Goldman Sachs representative or at www.gs.com/research/hege.html. Goldman Sachs does not endorse any candidate or any political party. Copyright 2026 Goldman Sachs. All rights reserved.