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A
From the Trump Xi 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. Allison I'm Allison Nathan. 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 Trump Xi meeting, the semiconductor chip shortage and the broader forces shaping markets across North Asia. Tim, welcome to Exchanges.
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B
Well, thank you so much for having me.
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A
So, Tim, let's start with last week's much anticipated summit between President Trump and and China's President Xi Jinping. What stood out most to you from those discussions?
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B
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 against the background of tension geopolitically 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.
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A
So that is an encouraging takeaway, I think. No harm done. I like that, Tim, in 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?
- [02:15]
B
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 H 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 MSCI China Index, which is our favorite measure of offshore equity performance, is down 2% year to date. So there's a decent spread between those two. We've been much more positive on 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 orbit hits the road is earnings. And the consensus numbers for A shares have gone from 16 to 25% for this year, a bit lighter at 20, but still we've raised our numbers. And this really is a reflection that China's 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 are much more sensitive to producer prices. 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, 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 on 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 the 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 look, 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 MSCI China index is in those Internet software oriented companies that I mentioned. 25% of that is Tencent and Alibaba, and there's a number of others which make up the rest of the but beneath that, there's a bull market going on in semiconductors, in biotech, in low earth orbit satellites, space trade, in robotics, et cetera. But there's still small enough caps that they're not really picked up or they're 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 of 20% year to date. So you've got really a number of different Chinas 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.
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A
It'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?
- [05:40]
B
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 number one, we've got very good sort of 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 from week 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 is 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. 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 valuation is looking expensive. It feels like it should be doing better, but 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.
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A
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 to date?
- [07:17]
B
So I think a really handy way to understand how markets are trading and why they've performed in the way they have with this massive outperformance in some North Asian 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. The AI boom which is going on now, North Asia is basically more insulated so far from the energy shock. Not because North Asia doesn't import lots of energy, oil and that gas, but, but because two reasons. Basically they have greater buffer stocks, number one and number two, they're frankly they're richer and they can afford to pay a higher price for whatever supply is available. In contrast, South Asia has much fewer buffers and doesn't have the ability fiscally to offset the pass through of higher energy prices to the economy. So we've seen a much more direct shock. And so for example, we've taken our Philippines GDP numbers down by 1/2 percent, but we only cut China's by 10 basis points, right? 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 Taiwan's market is tech oriented with some way in which touching AI in some quantifiable shape or form. 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's 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 within Asia. And I think this sort of these two axes I just mentioned handily explain why that has been the case.
- [09:00]
A
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 a key driver so far, extrapolating it too much into the future and ultimately that's not sustainable.
- [09:20]
B
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. 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 our 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. I mean, that's a phenomenal number. And with that sort of acceleration in demand and a step function increase as you transit from the inference AI economy to the agentic AI economy, supply is just not going to be able to keep up with that. And 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 various parts of the supply chain. So the good news here is we think that lasts longer than the market is currently expecting. And a good way to quantify that is that, for example, the Korean semi stocks, Samsung and Hynix, 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 trended basis. So that's the good news. I'd say the more challenging news is more the tactical outlook here. These stocks have appreciated 200% or more year to date. The relative strength index, which is one measure of share price momentum, which is recently 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 when there was some concerns about a strike for Samsung. But the key point is that when the stocks are that hot, they're going to sell off on almost anything that happens. It'll just be a convenient excuse for some fast money to take profit. So we've been very focused on how to hedge downside in the short term. And there's some derivative overrays which appear 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.
- [11:54]
A
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?
- [12:12]
B
I'd 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 swath 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 broad 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 has outperformed globally, I think it's the fourth year in a row Taiwan has outperformed. TSMC is like MAG1. I mean US is MAG7, Taiwan is MAG1. TSMC is 55% of the MSCI Taiwan index and 40, 45% of the broader TWSE index. And, 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 outperformance 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 consensus is at 269% profit growth, 269, we're at 300. If you strip the memory stocks out of those numbers, the rest of the market's still growing over 40%. And that's because you've got attractive themes going on in these are all areas that we like in shipbuilding, power equipment, defense spending, you've got K culture, you've got the bottom up improvement in 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 air that can be let 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.
- [14:03]
A
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 Korea and Taiwan has edged Japan out of the spotlight. But if we think about where Japan is right now, is it attractive from a valuation and positioning perspective or is a lot of that priced in? How are you thinking about Japan?
- [14:28]
B
So we're also overweight Japan and 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, just you don't have the same underlying earnings growth and it's not coming off as low valuation base. But we're still quite constructive and it's been doing quite well this year with the notable wedge that's accumulated between the performance of Nikkei which is more tech oriented versus Topix which has a greater diversification including banks and others. So Nikkei is up around 20% year to date and topics up 8. In fact, if you look at the NT ratio, Nikkei versus topic ratio, that's actually at an all time high which shows that the market has really been veering toward the AI trade in Japan as well as it has obviously in Korea and Taiwan have been discussing. But look, the investment case for Japan I think really rests on four key pillars. One is that following the February 8th record strong election of Prime Minister Takechi, that gives a measure of political stability and that in turn is worth something from multiple standpoint. So we raise our targets after that because if you look at historical analysis, not only is the market empirically done well when you've had these very strong election results, but also you see the valuations tend to improve and that makes sense because it's basically a reduction of equity risk premium because you can have a little bit more confidence in the duration the current administration, you know, that's number one. Number two, we've got decent earnings growth about 10% thereabouts. I mean doesn't sort of set the charts on fire but it's perfectly decent and it's probably got upside risk to it because with the yen at the high 150s level the markets probably come some translation gains which will give it a little Bit more delivered upside. You also have quite a large number of themes that we really like. Some of the ones that which I just mentioned for Korea, also true in Japan, AI, particularly robotics and what we call physical AI, you've got a variety of supply chains for Internet, you've got shipbuilding, you've got power generation. And a lot of this we wrap into the theme of US re industrialization where Korea and Japan are part of the upstream supply chain that goes into that theme. And we think that's a five to ten year theme. It's something we have a great degree of conviction in. You've also got a normalization of Japan, as you were previously noting for China coming out of deflation and that's generally better for consumption and the domestic economy. You've got a normalization of interest rates. Now there's a risk they could normalize too fast, but if they do, then that's basically good for the banks because you get a steeper yield curve and higher absolute level of rates, which is good for the banks. And then look, the other thing is you've got a lot of potential energy from domestic investors who still have a lot of cash in the bank. And there are tax advantages to deploying that into the equity market through so called NISA funds. And there's also a favorable flow dynamic which is a slower burning fuse. Then of course something we've written a lot about is the improvement in corporate governance, which is really inspiration in Korea for Korea's value up program. So we think that there's more to go in Japan in that regard. So you know, there's a lot of things that are going on. Maybe just the last point I'll make, it's a piece we just put out the so called halo trade, heavy assets, low obsolescence. We've written about that for the region as a whole. Our European colleagues written about that. We just put out a piece in Japan about that. And that's another way of identifying another vector in Japan to be in favor of.
- [17:28]
A
So if you take a step back, Tim, and think about all the conversations you've had with global investors, what is the biggest misconception they still have about North Asian equity markets right now?
- [17:40]
B
I think one of them I mentioned is still deep skepticism about the duration of the semiconductor memory cycle. Now that's probably true globally. They'd probably be saying about Micron in United States as well. But certainly in Korea that's one of the common refrains that we hear. I'd say also there's just a lot of discussion about China, and China's always complicated and there's a variety of different viewpoints on that. I tried to elucidate some of the key points or views that we have earlier, but I'd say that there still are some misunderstandings there. And I would say that the farther away people are, I'd say the less that they are aware of how much structural improvement there's been in terms of companies in Japan, Korea, China, even Singapore is getting on board with the whole theme of trying to improve returns on equity, to improve dividend payout ratios. And also what for Asia is a newer phenomenon, but is of course very familiar to US Investors, is stock buybacks. And the advantage of that in terms of narrowing share count and improving ROE and boosting share price performance. So this is a relatively newer phenomenon for Asia and it's one that I think investors from a distance are perhaps not as aware of as they should be.
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A
So just to wrap up Tim, what are you watching when you are thinking about what will determine whether North Asia outperformance will continue and be sustainable?
- [19:00]
B
Really, I get back to the axes that I mentioned before. In the tech front, you just have to wake up every day and see what the news flow is and see if it confirms or denies your core thesis. The tech world is just as we, I'm sure we all know, is just moving so incredibly fast that you've just got to be on your toes in terms of what's price, what's the new information, is there any new disruption which is coming which could change your investment thesis? You just have to be very humble and open minded and reassess things. Our base case is still very constructive as I was mentioning, but we're humble enough to recognize that change can come very quickly. We need to be alert to that as much as we can be, especially given in the short term the fact that markets are overstretched and pretty vulnerable to some sort of a pullback. And then the other axis of course is the energy supply one. And this is one I think is more a near term area of potential concern, which is that if the Strait of Hormuz remains closed and energy supplies are cut off, you know, really beyond I guess another six weeks or it's hard to know the exact number, but just some sort of indeterminate but not super far in the distance duration, then you start getting convex negative impacts in terms of energy availability, energy pricing and all the downstream cascades or supply chain cascade through petrochemicals, food, et cetera. And with markets generally being up relative to February 27, which is a closing high before the start of the Iran war, and investors feeling pretty good about things, then there could be a rude awakening that oh, actually this energy supply shock is really not going to hit because markets being forward looking, have kind of looked through it and sort of assumed, look, it's over. We don't know exactly when, but we're going to look past that, which is understandable. But if the actual the end doesn't come as 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.
- [20:46]
A
I think we are watching that more broadly, of course, all eyes 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.
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B
Thank you so much for having me.
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A
This episode of Goldman Sachs Exchanges was recorded on Monday, May 18, 2026. I'm Allison Nathan. Thanks for listening.
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C
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