Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How South Korea's Export Machine Is Hitting a Wall
Transcript
- Lucas: South Korea's export machine has been the envy of the emerging world for decades. But right now, that machine is sputtering. Luna: Yeah, the numbers this past week are pretty stark. EWY, the Korea ETF, down 11 percent in five days. That's not just a bad week. Lucas: It's not. And to put it in context, that's a bigger five-day drop than we've seen from most other emerging markets. Compare that to the iShares China ETF, FXI, which is actually up over three percent in the same period. Luna: So the story is very specifically about Korea right now, not a broad emerging market sell-off. What's driving it? Lucas: Semiconductors. They account for roughly 20 percent of South Korea's total exports. Memory chips specifically. And the global demand picture for memory has been weakening for months. You've got oversupply in DRAM and NAND, prices falling, and then on top of that, the us china tech war is creating a lot of uncertainty for Korean chip makers. Luna: Because both Samsung and SK Hynix have huge manufacturing bases in China, right? They're caught in the middle. Lucas: Exactly. Samsung alone has about 40 percent of its NAND flash production in Xi'an, China. And with the latest export controls from Washington, there's concern that those facilities could be impacted if the rules tighten further. That's a real risk premium that investors are starting to price in. Luna: And it's not just semiconductors. Korean exports to China overall have been sliding. The trade surplus with China, which used to be a massive source of income, is shrinking. Lucas: Right. China has been Korea's largest trading partner for years, but now China is also becoming a competitor in some of the same industries. Shipbuilding, displays, even memory chips to some extent. The Chinese are investing heavily in domestic chip production. So Korea is losing market share at the same time that global demand is softening. Luna: There's also the currency angle. The won has weakened against the dollar over the past year, which normally helps exporters. But this time it seems like the weakness is more a symptom of the problem than a solution. Lucas: That's a really good point. The won is down about 8 percent against the dollar year-to-date. But if the demand for your products is falling, a cheaper currency doesn't automatically boost volumes. Especially when your main competitor, China, is also seeing yuan depreciation. The yuan is at 6.78 per dollar as of this week, also weaker. So you're not gaining a competitive advantage. Luna: So what does this mean for investors who hold Korea as a core emerging market position? Is this a buying opportunity or a structural shift? Lucas: I think you have to distinguish between cyclical and structural. The semiconductor cycle will eventually turn. Demand for memory will recover as AI and data center build-outs continue. But the structural challenges are real: China's rise as a tech competitor, the reshoring of supply chains, the geopolitical risk. Korea's export model worked brilliantly for 50 years, but the world is changing. Luna: And it's not just Korea. Other export-dependent emerging markets are facing similar pressures. Taiwan's ETF is down nearly 6 percent this week. But Korea is sort of the canary in the coal mine because of how concentrated its export basket is. Lucas: Exactly. It's a reminder that diversification matters, even within an emerging market portfolio. You can't just buy the index and assume all EM countries will perform similarly. Korea and China are diverging right now in a big way. Luna: You know, this is exactly the kind of conversation that I think is valuable for listeners who want to understand what's really driving markets. And one thing I appreciate about this show is that we don't have to interrupt that conversation with ads. Lucas: Yeah, that's a deliberate choice. We keep the show ad-free because we think the analysis is better when it's not broken up by sponsorship messages. If you find value in that approach, and you want to support it, you can do so at buy me a coffee dot com slash fexingo. Luna: It's a simple way to keep this going without us having to pitch you credit cards or mattress companies. Lucas: Exactly. So back to Korea. The question I keep coming back to is whether the government can do anything to cushion the blow. They've announced a 26 billion dollar support package for the chip industry, but that's more about long-term competitiveness than immediate demand. Luna: And there's also the political risk factor. The current administration in Seoul has been trying to balance relations with both the US and China, but that's getting harder. The recent headlines about Trump alleging Chinese meddling in US elections only adds to the tension. Lucas: Right. Korea is in a tough spot geopolitically. It relies on the US for security, but on China for trade. As those two powers become more adversarial, Korea gets squeezed. That's not something that a fiscal stimulus package can fix. Luna: So when you look at EWY trading at 163 and change, down 11 percent in a week, where do you see the bottom? Lucas: I don't call bottoms, but I'd look at the price to earnings ratio. Korea's market historically trades at a discount to other EM markets, the so-called 'Korea discount' due to governance issues. Right now, the forward P/E for the KOSPI is around 9. That's cheap, but it could get cheaper if earnings estimates get cut. And I think earnings estimates are still too high. Luna: So you're saying the sell-off might have further to go? Lucas: I think there's more downside risk in the near term. But for a long-term investor, Korea still has strengths: world-class companies in tech, a highly educated workforce, and a strategic location. The key is to watch the semiconductor cycle and the won-yuan exchange rate. If those stabilize, the whole picture changes. Luna: And for listeners who want to track this, what are the key data points to watch? Lucas: Monthly export data from Korea Customs Service, particularly semiconductor exports. Also the Purchasing Managers' Index for manufacturing. And keep an eye on the Bank of Korea's interest rate decisions. They've been holding rates steady, but if the economy slows further, they might cut, which could provide some support. Luna: Great stuff. So the export machine isn't broken, but it's clearly in need of a tune-up. Lucas: Yeah. And whether that tune-up comes from global demand recovery or domestic policy, it's going to take time. For now, Korea is a market to watch closely, but not necessarily to jump into without a clear catalyst.