Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Emerging Market Stocks Are Splitting Into Winners and Losers
Transcript
- Lucas: So Luna, let's start with a number: Chinese internet stocks have had a week that would make most asset managers do a double take. Alibaba is up more than six percent in five days, JD.com is up nearly seven, and the KraneShares China Internet ETF, K-W-E-B, has gained over five and a half percent. Luna: That's a big move. And meanwhile, Korea's ew y, the iShares MSCI South Korea ETF, is down two and a half percent over the same stretch. It feels like two different worlds inside the emerging markets umbrella. Lucas: Exactly. And that's the story I want to dig into today — this widening split between the winners and losers in emerging markets. It's not just China versus Korea, though that's the sharpest contrast right now. It's about what's actually driving these moves, and whether it's sustainable. Luna: So what's driving the China rally? Is it just a rebound from oversold levels, or is something more fundamental going on? Lucas: I think it's more than a technical bounce. Look at the broader context: the US trade deficit widened significantly in the latest reading, and exports are up. That's partly a sign of strong global demand, but it also means the US is importing more, and a lot of that is coming from emerging markets, especially China. Luna: So a bigger US trade deficit is actually good for some emerging markets? Lucas: It can be, if you're a net exporter to the US and your currency isn't too strong. China fits that bill. The yuan has been stable around 6.77 per dollar, which keeps Chinese goods competitive. And the trade-weighted dollar index is still very high, around 120.7, which actually helps exporters in emerging markets because their currencies are weaker relative to the dollar. Luna: But Korea is also a big exporter, and it's getting hit. Why the difference? Lucas: That's the key question. Korea's problem is structural — its exports are heavily weighted toward semiconductors and memory chips, and that sector is in a downturn. Plus, the Korean won has been under pressure, and there's the whole AI hardware story. While Chinese tech companies are adopting AI to boost their services, Korean chipmakers are more exposed to the hardware cycle, which is softening. Luna: So it's a tale of two tech stories: AI adopters versus AI hardware suppliers? Lucas: Precisely. And that's a theme we've touched on before, but it's becoming more pronounced. Chinese internet companies like Alibaba and JD are integrating AI into their platforms to drive efficiency and new revenue streams. That's showing up in their numbers and in investor sentiment. Meanwhile, Korean exporters are stuck with oversupply in memory chips and weaker pricing power. Luna: I've also noticed that the US Treasury intervened to support the yen recently. Does that have spillover effects for emerging markets? Lucas: It does, especially for countries that compete with Japan in exports, like Korea. A stronger yen can actually help Korean exporters by making Japanese goods more expensive, but it also signals that currency wars are heating up. And when the US steps in to weaken the dollar, it can boost emerging market currencies, which is a double-edged sword — it helps with inflation but can hurt export competitiveness. Luna: So the yen intervention might indirectly be a headwind for Korean stocks, even if it helps some other markets. Lucas: Right. And that's why we're seeing this divergence. The winners are the markets that can ride the AI adoption wave and benefit from a stable or weaker currency. The losers are those stuck in the old hardware cycle and overly reliant on exports to a slowing global economy. Luna: But wait, isn't Brazil also an exporter, and it's up two percent this week. What's their story? Lucas: Brazil is a different case. It's more about commodities and domestic demand. The ew z is up because commodity prices are firm and Brazil's central bank has been managing inflation well. Plus, there's a political element — investors are hopeful about fiscal reforms. So it's not just about tech; it's about which countries have their macroeconomic house in order. Luna: So for an investor, does this mean you should be tilting your emerging market allocation toward China and away from Korea? Lucas: I'd be cautious about making a blanket call. The China rally might have legs, but it's also come after a long period of underperformance, so there's a catch-up element. And Korea's selloff might be overdone. But I think the bigger lesson is that emerging markets are no longer a monolith. You have to look at the specifics — which sectors, which currencies, which policies. Luna: That makes sense. And it ties back to something we've discussed: the rise of AI is creating winners and losers within emerging markets, not just between them and developed markets. Lucas: Exactly. And speaking of that, we should also consider the impact of the US trade deficit widening. That's a structural shift that's been building for months, and it's going to keep affecting which emerging markets thrive. Luna: How so? Lucas: Well, a wider deficit means the US is consuming more than it produces, and that demand is being met by imports from countries like China, Mexico, and Vietnam. But it also means those countries are accumulating dollar reserves, which they might invest in US assets or use to build their own infrastructure. The trade-weighted dollar index being high makes those reserves more valuable, but it also makes it harder for them to export to other markets. Luna: So it's a complex web. But for the average listener, what's the actionable takeaway? Lucas: I think the takeaway is to think of emerging markets as a basket of distinct opportunities, not a single asset class. And to pay attention to the currency moves and the AI angle, because those are the two big forces reshaping the landscape right now. Luna: Before we go further, I want to pause on something. This kind of analysis is exactly why I value this show, and it's only possible because of listener support. If you've gotten something out of these conversations, and you want to keep them ad-free and independent, you can support us at buy me a coffee dot com slash fexingo. It's a couple of dollars a month, and it genuinely makes a difference. Lucas: Yeah, we really appreciate it. It keeps us going. Now, back to the divergence — one thing I want to highlight is the role of the dollar. The trade-weighted dollar index is still near record highs, around 120.7, and that's a double-edged sword for emerging markets. Luna: On the one hand, it makes their exports cheaper, but on the other, it makes dollar-denominated debt more expensive to service. Lucas: Right. And that's why countries with high external debt, like Argentina or Turkey, are still vulnerable. But countries with strong reserves and current account surpluses, like China, are better positioned to weather the storm. Luna: So the current account balance — the US is running a deficit of over 226 billion dollars so far this year. That's a lot of dollars flowing out to the rest of the world. Lucas: It is. And those dollars have to go somewhere. A lot of them are ending up in emerging market assets, which is partly why we're seeing inflows into ETFs like EEM and VWO, which are up on the week. But the key is that not all emerging markets are equal beneficiaries. Luna: Right. So how should an investor position themselves? Is there a specific ETF or sector that captures this AI adoption theme? Lucas: Well, if you want to play the AI adoption angle, you might look at China internet ETFs like K-W-E-B, which we mentioned, or m c h i, the iShares China Large-Cap ETF. But be aware of the volatility. These are high-beta plays. On the flip side, if you're worried about the hardware cycle, you might underweight Korea for now, but keep an eye on it for a rebound. Luna: But isn't there a risk that the China rally is just a bubble? Lucas: There's always that risk, especially in a market that can be driven by retail sentiment. But I'd note that Alibaba and JD.com have been trading at relatively low valuations compared to their US peers, even after this week's gains. So it might be more of a repricing than a bubble. Luna: That's a good point. And what about the geopolitical risks, like the tensions in the Middle East and the threat to shipping lanes? How does that factor in? Lucas: That's a wildcard. If oil prices spike, that's bad for oil-importing emerging markets like India and Turkey, but potentially good for exporters like Russia and some Gulf states. It also adds to the general uncertainty, which can drive investors toward safer havens and away from riskier assets. But so far, the market seems to be taking it in stride, as we haven't seen a major selloff this week. Luna: So it's a lot to consider. For our listeners who are just getting into emerging markets, what's the one thing you'd tell them? Lucas: I'd say don't treat emerging markets as a single trade. Do your homework on the specific countries and sectors you're investing in. And be prepared for volatility — it's part of the game. But the potential for growth is real, especially in places that are adopting new technologies and managing their economies well. Luna: Well said. And I'd add that keeping an eye on the dollar and trade flows can give you a head start on where the winds are blowing. Lucas: Absolutely. And to bring it home, the split between China and Korea is a perfect example of why you need to look under the hood. It's not just about the EM label; it's about the individual stories. Luna: Thanks for joining us on this episode. We'll be back soon with more insights from the world of emerging markets.