Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How the Strong Dollar Is Splitting Emerging Markets
Transcript
- Lucas: Luna, the trade-weighted dollar index is at 120.7 as of last week. That's down a hair from 121.15, but let's be honest — the dollar is still brutally strong by historical standards. And it's not hitting every emerging market the same way. Luna: You can see it in the ETF flows. EEM's down almost 4 percent in five days, VWO off 1.4 percent. But then you look at China-specific ETFs like FXI or KWEB — up 2.8 and 4.3 percent respectively. That's not just noise. Lucas: Right. So let's talk about the divergence. The strong dollar narrative is usually painted with a broad brush — 'emerging markets get crushed when the dollar rallies.' But the data this week tells a more nuanced story. South Korea's EWY ETF lost over 10 percent in five days. Taiwan's EWT dropped 6 percent. Meanwhile Brazil's EWZ is basically flat, and China's names are green. Luna: So what's the dividing line? Is it commodity exporters versus importers? Net creditors versus debtors? Lucas: Both, actually. But let's start with the dollar debt angle. When the dollar strengthens, any country or company that borrowed in dollars faces higher real debt service costs because their local currency buys fewer dollars. That's a classic emerging market vulnerability. But not all EMs carry the same dollar debt burden. Lucas: Take South Korea. It's a developed-ish economy by some metrics, but it's heavily exposed to trade and has a significant amount of external debt. The won has been under pressure — you saw the headlines about the Korean won crisis in prior episodes. The EWY selling reflects genuine macro stress. Luna: And Taiwan? EWT down 6 percent feels outsized for a tech powerhouse. Lucas: Taiwan is a bit different. It's a net creditor with massive FX reserves. The stock weakness there is more about tech sector rotation — rising rates globally compress valuations for high-growth stocks, and Taiwan Semiconductor and its peers are caught in that. But the currency itself, the Taiwan dollar, has held up relatively well. Luna: So the ETF price isn't purely a currency story. It's also about sector composition. Lucas: Exactly. And that's why China is interesting. The MCHI ETF, which tracks Chinese equities, is up 1.5 percent. The KWEB, which is Chinese internet names, up over 4 percent. That's partly because China is a net creditor — it holds over $3 trillion in reserves — so the strong dollar doesn't create a debt crunch. And partly because Chinese stocks were already beaten down so much that any good news triggers a rally. Luna: Pinduoduo, for example, jumped over 8 percent in the last five days. That's a massive move for a single stock in an ETF context. Lucas: Yeah, Pinduoduo — ticker p d d — is up 8.2 percent. And Alibaba, BABA, up 2.3 percent. These are names that have been hammered by regulatory crackdowns and economic slowdown fears. But when the dollar strengthens, it doesn't hurt them directly. Their revenues are in yuan, their costs are in yuan. The dollar debt is minimal for most of these companies. Luna: Compare that to a country like Turkey, which we haven't mentioned yet. The lira has been in freefall for years. Any dollar strength just compounds the problem. Lucas: Turkey is the extreme case. High dollar-denominated debt, chronic current account deficits, and unorthodox monetary policy. When the dollar index moves up, Turkey feels it immediately. But there's a middle ground too — countries like India. The INDA ETF is basically flat, down 0.1 percent. India has decent reserves and a growing export base, but it also imports a lot of energy. So the strong dollar raises its import bill. Luna: And oil spiked 5 percent today after the Iran ceasefire story collapsed. That's a double whammy for oil importers like India and Turkey. Lucas: Exactly. So the big picture is this: the strong dollar is not a uniform EM story. The winners are net creditors with low dollar debt and domestic revenue streams — China, to some extent Brazil given its commodity exports. The losers are high-debt, current account deficit countries like South Korea, Turkey, and potentially Indonesia. Luna: And Mexico? EWW is only down 0.3 percent. That's surprisingly resilient given the peso's history. Lucas: Mexico benefits from nearshoring — US companies moving supply chains closer to home. That FDI inflow provides a buffer. Plus, Mexico's central bank has been pretty hawkish, keeping rates high to defend the peso. So even with a strong dollar, Mexico is holding up. Luna: So what does this mean for an investor trying to allocate to EM right now? Should they just buy China and skip the rest? Lucas: That's the temptation, but it's not that simple. China's rally could reverse quickly if the yuan weakens further. The yuan per dollar is at 6.79 — that's relatively stable, but if the Fed keeps rates high and China's economy doesn't recover, the yuan could depreciate more. That would hurt even Chinese equities in dollar terms. Lucas: I think the more nuanced take is: be selective. Look at each country's external balance sheet. Countries with current account surpluses and manageable dollar debt — like China, Taiwan, and maybe Brazil — can withstand dollar strength. Countries with deficits and high debt — like South Korea, India, and Turkey — are more vulnerable. Luna: And the current account data we have for the US shows a widening deficit — negative $227 billion in January. That's not directly EM, but a bigger US deficit often means a weaker dollar eventually. If the dollar starts to turn, those vulnerable EM names could rebound sharply. Lucas: That's the key insight. The strong dollar narrative might be peaking. The dollar index has dipped slightly from 121.15 to 120.7. If that trend continues, the most beaten-down EM markets — like South Korea — could see massive relief rallies. But timing that is impossible. Luna: So it's a watching game. But at least now we know which EMs are in the danger zone and which ones are just along for the ride. Lucas: Right. And speaking of the ride, if you find these macro breakdowns useful — walking through the data to make sense of the headlines — we keep this show ad-free thanks to listeners who chip in. You can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep the conversation going without commercials. Luna: Yeah, it really does make a difference. Every contribution helps us spend more time digging into the numbers instead of chasing sponsors. Lucas: Alright, back to the divergence. One more data point I want to highlight: the yen per dollar is at 160.9, down from 162.41. That means the yen has strengthened a bit this week. That's important because the yen is a proxy for carry trades — when the yen strengthens, those carry trades unwind, and that can hit EM currencies that were funded by cheap yen. Luna: So we've got multiple layers: the dollar itself, the yen carry trade, commodity prices, and individual country fundamentals. No wonder EM investing is a headache. Lucas: But that's what makes it interesting. If you can identify which countries are structurally resilient and which are just riding the wave, you can find opportunities. Right now, the market is pricing in a lot of pain for Korea and Taiwan. Some of that is justified, some might be oversold. Luna: And what about the headlines today? Oil surging 5 percent on the Iran ceasefire collapse. Does that change the EM calculus? Lucas: Oil is a huge factor. Higher oil prices benefit exporters like Brazil, Colombia, and maybe Indonesia if it continues. They hurt importers like India, Turkey, and most of Southeast Asia. So the oil spike reinforces the divergence we've been talking about. Brazil's EWZ was flat this week, but if oil stays high, that could flip to a gain. Lucas: Meanwhile, India's INDA is already flat, but higher oil could push it negative. It's a classic asymmetric risk. Luna: So the strong dollar, the oil spike, and the yen move — all pointing to a bifurcated EM landscape. I guess the big question for listeners is: are you positioned for that? Lucas: And that's the question we'll keep tracking. Next episode, we'll drill into one of these countries in more detail — maybe South Korea, given the 10 percent drop in EWY. Is that a buying opportunity or a value trap? We'll dig into the fundamentals.