Goldman Sachs favors North Asia’s tech-heavy markets.

Why North Asia, and why now

Goldman Sachs Research says the balance of opportunity in Asian equities is tilting toward the north. Look, the firm points to two big forces: the expected peak in U.S. Interest-rate rises and what it calls a broad-based growth recovery in China after the end of zero-COVID policies.

Those two forces can change where investors put money — north Asian shares are already showing the effect.

GS strategists argue the combination could push regional earnings momentum higher. They note that investors have already started to "pre-trade" an improvement in the macro outlook — taking on more risk ahead of the shift they expect toward midyear. And Bottom line: north Asian markets, which are heavier in technology and cyclical sectors, may get a lift ahead of peers in South Asia and ASEAN.

Markets tend to anticipate economic shifts; north Asian equities outperformed at the start of the year. The report says that has happened at the start of the year, when north Asian equities outperformed.

China: more than reopening

Goldman’s review of China concludes the market rally isn't just a consumer-led bounce. The bank describes what’s unfolding as a wide-based growth rebound touching multiple industries, not merely a services recovery tied to relaxed COVID rules.

Thing is, investors have already rewarded that view: the bank notes the MSCI China index has rallied roughly 55% from its low on Oct. 31, 2022.

Because they see momentum beyond just reopening, GS raised its estimate for China’s corporate earnings growth. The strategists lifted their China earnings-growth projection to 17% for 2023, up from a prior forecast of 13% at the end of 2022. That change reflects what the bank describes as policy easing across several fronts — monetary, fiscal, property and regulation — and the shift away from zero-COVID.

GS argues the rally is more than a reopening trade — policy easing across monetary, fiscal, property and regulatory fronts should help profits across many Chinese industries.

South Korea: cyclical pain, but a potential rebound

Goldman’s note singles out South Korea as a market that could brighten once global demand picks up. For now, the report says near-term earnings in Korea look weak, driven by a soft global growth backdrop and the country’s heavy exposure to cyclical sectors such as semiconductors.

And because some of Korea’s largest firms operate with high operating leverage, profits are hit harder during downturns. Still, GS expects those pressures to ease as the global cycle turns, making Korea a candidate for stronger performance if global growth recovers as the bank anticipates.

Timing: rates, the dollar and regional flows

Central to Goldman’s thesis is the timing of U.S. Monetary policy. The bank expects the federal funds rate to peak in the second quarter — a moment it calls a potential inflection point for Asian equities given the oversized influence U.S. Rates have on regional asset prices.

Right now, GS also expects the U.S. Dollar to strengthen over the next three to six months, then peak around midyear and weaken toward the end of the year. Historically, the strategists note, there's a strong inverse relationship between the dollar and Asia-Pacific equity returns, so a late-year dollar softening would be supportive for regional stocks.

Goldman says a Fed peak, a softer dollar and China's recovery would lift regional earnings; its scenario lifts growth from about 4% this year to roughly 16% next year. The bank’s scenario shows regional earnings growth moving from about 4% this year to roughly 16% the next year — a sizable swing that would likely change portfolio allocations across Asia.

Where to add risk

Goldman doesn't say investors should simply load up on every Asian market. The strategists emphasize differences across countries and sectors. North Asia’s tilt toward technology and cyclical industries means it stands to gain substantially if the macro setup improves as forecast.

But GS cautions that not every economy will react the same way. Markets such as India and many ASEAN members, which have driven returns in past periods, may underperform relative to north Asian peers if the scenario Goldman outlines plays out.

Investors, the report implies, should think about reweighting exposure rather than taking blanket bets. That could mean adding to tech and cyclical names in China and Korea while trimming relative exposure to markets whose strength was tied more to earlier drivers such as domestic consumption and services.

Market mechanics and investor behavior

Goldman's note shows investors are already positioning for this shift — some have 'pre-traded' the expected improvement by taking on more risk. GS says some market participants have begun to "pre-trade" the anticipated improvement in regional growth and earnings — buying into the idea that policy and macro conditions will pivot later in the year.

Those positioning trades can magnify market swings, as early flows into north Asian equities tend to feed momentum. When the macro backdrop turns as expected, flows into north Asian equities could accelerate. Conversely, if the dollar holds firmer or China’s recovery falters, the early positioning could reverse quickly.

Goldman’s framing is practical: the path of U.S. Policy and China’s momentum will likely determine whether allocation trends persist. For portfolio managers weighing Asia exposures, the timing of those developments matters as much as the direction.

What this means for investors

For investors tracking Asia, Goldman’s call is a tactical nudge. If you accept GS’s scenario — Fed peaking in Q2, a midyear dollar peak, and a China-led rebound spreading into other north Asian markets — then north Asia’s technology and cyclical stocks become a logical place to find upside.

At the same time, the bank’s analysis suggests patience and selectivity. Not all tech names or cyclicals will perform the same, and country-specific risks remain.

Bottom line: Goldman sees a tactical window for north Asian stocks, especially tech and cyclicals, if the Fed peaks in Q2 and China's rebound continues. Whether that window stays open depends on a few macro beats that investors are already trying to price in.

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Goldman raised its China earnings-growth projection to 17% for 2023.