Why sharply cut the target while remaining positive on Korean equities?

  • Goldman Sachs cut its 12-month KOSPI target from 12000 to 9000 points and its MSCI Asia Pacific ex Japan Index target from 1120 to 1040 points, citing greater market volatility and slowing earnings momentum. The cuts reflect more conservative assumptions, while its assessment of the current risk-reward profile of Korean equities remains positive.
  • The bank believes the recent sharp sell-off was driven by retail investors reducing risk exposure and concerns about the heavily weighted memory sector. In its assessment, current prices imply a pessimistic scenario in which 2027 earnings are 65% below consensus.
  • Its positive view extends further to non-memory industries: the concerns have spilled over, but Goldman Sachs believes corporate profits remain strong and corporate governance reforms continue to advance. Korean non-memory stocks' forward 12-month price-to-earnings ratio has fallen to a historical low of 7 times, providing an important basis for its valuation assessment.

How have the selection criteria for Asian allocation changed?

  • Against a backdrop of relatively high interest rates and energy prices, Goldman Sachs adjusted its 55 Asian strategy baskets for the fourth quarter of 2026, placing greater emphasis on structural growth supported by earnings, high-quality companies and valuation discipline, and reducing reliance on a broad market rise.
  • Its specific preferences are growth stocks at reasonable valuations, assets offering earlier cash returns, and companies with robust balance sheets and secure dividends. By sector, it favors value opportunities among global cyclicals and rate-sensitive financials, while taking a relatively cautious view of domestic consumer demand.
  • Thematic selections also center on specific demand: AI infrastructure emphasizes earnings visibility, while productive capital expenditure focuses on the actual beneficiaries; grid equipment and nuclear power correspond to bottlenecks in electrification. Korean allocations also include industrials, corporate governance reform, reflation and Korean culture themes.

With strong AI demand, why are some earnings forecasts still being cut?

  • The growth case for high-end PCBs, copper-clad laminates and substrates rests on specification upgrades and direct customer investment in capacity. Goldman Sachs expects the transition to M10/M11 solutions to accelerate from the end of 2027. As customers diversify supply sources beyond Japan, the market for copper-clad laminates used in ABF substrates is expected to grow from 800 million–1.2 billion US dollars in 2026 to 4 billion–4.5 billion US dollars in 2028, creating opportunities in sales volumes, selling prices and gross margins.
  • But it takes time for data-center demand to translate into profits. Innoscience has begun mass production of several gallium nitride solutions, and its 15V DrGaN product for AI GPUs has completed customer sampling. Because the timeline for scaling up production in its data-center business has lengthened, Goldman Sachs widened its 2026 net loss forecast to 455 million yuan and cut its 2027–2032 earnings forecasts by 2%–3%.
  • SMIC likewise faces a tension between demand and costs. Goldman Sachs believes high utilization, localization and capacity expansion help offset increased depreciation, but it cut its net profit forecasts for 2028 and 2029 by 14% and 7%, respectively, because of more conservative advanced-process pricing assumptions and the gross-margin pressure from new-capacity ramp-ups. It maintained its Buy rating.

When is a sharp share-price drop or an improvement in earnings still insufficient to support a buy?

  • Australian equity history offers a constraint: over the past 25 years, buying and holding an ASX 200 constituent after a one-day fall of more than 10% produced median excess returns of negative 10% over the following 12 months. For stocks that fell more than 30% in a day, the figure over the following year was negative 24%. This makes Goldman Sachs cautious about seeking value based solely on the size of a decline.
  • Earnings improvement must also be considered alongside the purchase valuation. Goldman Sachs expects cash earnings growth at Australia's major banks to rebound to a cycle high of 6.5% in fiscal 2026, with loan growth stronger than expected and net interest margins expected to remain stable. However, current valuation multiples are relatively high and provide insufficient cushion against macroeconomic headwinds, so it remains cautious on the sector and maintains its Sell rating on Commonwealth Bank of Australia.