Macquarie: Quality stocks outperform in Asia amid global sell-off By Investing.com

Macquarie reports quality stocks outperformed across Asia during the recent market sell-off, with momentum broadly sold off region-wide except in Taiwan and portfolios rotating from growth into value and defensives. Energy and materials saw the strongest earnings upgrades while IT supported revisions in Korea and Taiwan; Japan showed broad-based strength (ex-telecoms) and China shifted focus to fundamentals amid muted revisions. Overall earnings revisions remained resilient despite stagflation concerns, supporting a selective allocation toward quality/value within Asian equities.

Analysis

The current cross-market unwind is not a simple “growth vs value” rotation but a liquidity- and flow-driven compression that favors low-accrual, high-return names with visible capital return programs. When correlations spike and momentum desks sell indiscriminately, investors pay a premium for cash conversion and buybacks; that premium can persist for quarters as re-risking requires fresh macro or liquidity signals rather than single-company catalysts.

Energy and materials’ recent upward earnings revisions create an asymmetric trade: these sectors are benefiting from supply-side tightening and inventory draws that are slow to reverse, so incremental commodity strength can lift free cash flow materially (20%+ EPS leverage in many miners/refiners) within 3–9 months. Conversely, exporters and cyclical capex plays remain vulnerable to demand shocks and FX moves, so selectivity within cyclicals matters.

Finally, the momentum purge in parts of Asia has created flow-induced dislocations that can snap back quickly when policy or liquidity shifts occur — think China demand stimulus or a clearer Fed easing path. Tail risks: rapid FX moves (JPY, KRW, TWD), China policy disappointment, or geopolitics could re-tighten liquidity and reverse the quality bid. Monitor credit spreads and interbank liquidity as leading indicators for re-risking windows.

Key Decisions for Investors

• Long Toyota Motor (TM) — size 1.5–2% portfolio, horizon 6–12 months. Rationale: large export cash flows, visible buybacks/dividends and low accruals should outperform in a quality bid. Entry: buy shares or Jan-2027 1.2x-1.3x ATM calls; target +18–25% upside, hard stop -10% (or roll to calls if volatility spike).
• Long Taiwan Semiconductor (TSM) vs short Samsung Electronics (005930.KS) pair — equal notional, horizon 3–6 months. Rationale: Taiwan’s foundry momentum and earnings revisions are idiosyncratic and flow-supported while Korea remains more memory/capex sensitive; expect relative outperformance of ~10–15% if demand normalizes. Use options (buy TSM 6–9 month calls, finance with short-dated puts on Samsung) to cap downside; maintain 2:1 upside/downside R/R.
• Long BHP Group (BHP) or Rio Tinto (RIO) — horizon 3–9 months via 6-month call spreads (debit spreads). Rationale: materials earnings upgrades are early-cycle and offer >20% EPS leverage to commodity rallies. Position size 1–2%; target 20–30% gross return, stop and roll if underlying commodity reverses >12%.
• Tail hedge: buy 3-month ATM puts on iShares MSCI Asia ex-Japan ETF (AAXJ) sized to 1–2% portfolio cost. Rationale: preserves optionality against a liquidity-driven re-leveraging/shock and limits portfolio drawdown from another momentum unwind. Reassess hedge if vol term-structure flattens or if China/US rate signals clear a re-risking environment.