Goldman Sachs: Third-quarter earnings miss expectations as foreign outflows persist amid Asia-Pacific equity rebound

What divergence is the market rebound masking?

For the week ending 30 October, the MSCI Asia-Pacific ex-Japan Index (MXAPJ) rose 0.6%; South Korea, Hong Kong and India gained about 5%, 3% and 2%, respectively. Indonesia fell about 4%, while China’s A-shares and Thailand each declined about 3%. Technology stocks came under renewed pressure before the weekend, and foreign outflows continued.
MXAPJ fell 8% from its peak at the end of September, but is still up 14% year to date. Excluding Korea and Taiwan, the regional index is down 9% year to date. As volatility picked up in October, dividend and value styles outperformed growth, while Australia and India, with lower technology exposure, showed relative resilience.
Goldman Sachs data show that regional equity markets have historically tended to perform better from the fourth quarter through January of the following year, but this year MXAPJ’s performance in October was markedly weaker than its historical pattern for the same period.

The 545 companies that have reported third-quarter results account for 51% of MXAPJ’s market capitalization. Their combined net profit rose 107% year over year but fell 19% quarter over quarter. Actual profit for the first three quarters was equivalent to 69% of the full-year estimate, below the historical pace for the same point in the year.
Among the 256 companies with comparable Bloomberg consensus estimates, 33% beat expectations and 42% fell short; the median earnings surprise was negative 1.4%. The share beating expectations was 48% in Taiwan and 23% in Korea; in Korea, 60% fell short of expectations.
Share-price reactions were also weak: Goldman Sachs observed that stocks beating earnings expectations underperformed their respective local indices relative to historical patterns, while those missing expectations significantly underperformed.

During the week, foreign investors recorded net outflows of about 4.5 billion dollars from equities in emerging Asia excluding China. Taiwan saw net outflows of 5.2 billion dollars, partly offset by net inflows of 1.2 billion dollars into India. Goldman Sachs noted that foreign selling in Korea had slowed over the past two weeks, while selling in Taiwan had intensified.
As of 27 October, Goldman Sachs’ prime-brokerage business observed broad selling by regional hedge funds, led by Taiwan, Korea and Japan. Net leverage among Asia-focused long/short funds fell 16.9 percentage points to 48%, at the 21th percentile of the past year; gross leverage edged down to 189.3%.
Assets in Korean leveraged ETFs fell from a peak of 53 billion dollars to 16 billion dollars, then recovered to 20 billion dollars. Goldman Sachs said the rebound was mainly due to asset performance. Outflows had continued since late July, with dip-buying flows appearing only in the most recent week.

Goldman Sachs’ 12-month target for MXAPJ is 1,040 points, about 27% above the 819 points cited in the report. In its market positioning, Goldman Sachs is overweight Korea, A-shares and Taiwan. By sector, it is overweight banks outside Australia, capital goods, healthcare, and technology hardware and semiconductors.
Goldman Sachs estimates the market-cap-weighted forward price-to-earnings ratio for the next 12 months at 9.3 times; on an equal-weighted basis, it is 18.0 times, showing that overall valuations vary markedly with the weighting method.
The fourth-quarter index reshuffle cycle has begun: the MSCI and FTSE Global Equity Index Series are expected to announce review results on 11 November and the 13th, respectively. Large amounts of capital are benchmarked to the major indices, and constituent changes may prompt flows from passive funds and other investors.