Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Emerging Market Capital Flows Are Reversing in 2026
Transcript
- Lucas: South Korea's KOSPI just had its worst day in over two years — down 7% on Monday, June 8, 2026. That's a single-session wipeout that brought the index to its lowest since late 2024. Luna: And it's not just Korea. The broader emerging market ETF, EEM, fell almost 8% in the past five trading days. Something bigger is happening. Lucas: Right. So today, let's focus on one specific driver: capital flows. Foreign investors have been pulling money out of emerging markets at a clip we haven't seen since the taper tantrum of 2013. But within that, there's a fascinating divergence — some countries are getting hammered, others are relatively insulated. Luna: Let's start with Korea because the numbers there are stark. A CNBC headline this morning says foreign investors have dumped billions of dollars of Korean stocks this year despite a record rally in 2025. What changed? Lucas: A few things. First, the export machine is stalling. Korea is a bellwether for global trade — when the world buys less semiconductors, ships, and cars, Korea feels it first. And second, there's a political overhang: the government's been embroiled in a corruption scandal that's paralyzed policy. Combine that with the Iran-Israel strikes over the weekend, which spiked oil prices and risk aversion, and you get a perfect storm for outflows. Luna: The Korea ETF, EWY, is down over 19% in just five days. That's not a correction, that's a crash in EM terms. Lucas: Exactly. And the dollar hasn't helped. The trade-weighted dollar index is still near 119, down a hair from its peak but still very strong. For Korean exporters, a strong dollar should theoretically be a tailwind — they sell in dollars, their costs are in won. But the bigger issue is that global demand is slowing, and a strong dollar makes emerging market debt more expensive to service, which triggers capital flight. Luna: Let's talk about where the money is going instead. I saw that India's ETF, INDA, is down only 1.4% in the same five-day window. China's FXI is off just 1.7%. There's clearly a flight to perceived safety within EM. Lucas: Yes — and this is the key insight for investors right now. The old idea of 'emerging markets' as a monolith is dead. India is benefiting from its domestic demand story — it's less dependent on exports than Korea. China is somewhat insulated because its capital account is partially closed — foreign investors can't just pull money out overnight. So while both are down, they're not down 19% like Korea. Luna: And then you have markets like Saudi Arabia, which we talked about in a previous episode as a potential safe haven. The Saudi index is actually flat this week, helped by higher oil prices from the Middle East tensions. Lucas: Right. But let's zoom back to Korea because I think it tells us something about the broader cycle. Aswath Damodaran, the valuation professor at NYU, was in the news yesterday saying he's not buying SpaceX because it's 'too richly priced'. That sentiment applies to a lot of growth-exposed markets right now. Korean tech stocks — like Samsung and SK Hynix — had PE ratios that expanded a lot in 2025. When risk appetite turns, those are the first to get sold. Luna: So is this just a risk-off rotation, or is there something fundamentally broken in Korea? Lucas: I'd say it's a bit of both. The fundamental story is that Korea's export growth is slowing because its biggest customers — China, the US, Europe — are all facing headwinds. China's economy is growing below 5%, the US is flirting with a slowdown, and Europe is still in manufacturing recession. So the export channel is weakening. On top of that, the political uncertainty means the government can't pass stimulus or structural reforms. That's a recipe for sustained outflows. Luna: And the data bears that out. The trade balance numbers for the US — which is a proxy for global demand — show the deficit widening again. March 2026 goods and services deficit was $60.3 billion, up from $57.8 billion in February. Imports are rising faster than exports, which suggests domestic demand is still okay, but it also means the world's biggest consumer is buying more, not less. That doesn't sound like a global demand collapse. Lucas: That's a good point. So maybe the selloff is more about positioning and sentiment than a real demand shock. The Korean won has also weakened past 1,400 per dollar, which makes it even more attractive for foreign investors to sell — they get more won for their dollars when they exit. Luna: Let's look at other markets that are falling hard. Brazil's ETF, EWZ, is down 4.7% in five days. Thailand's EWT is down 7.8%. Mexico's EWW is down 3.6%. So it's broad-based, but the magnitude varies wildly. Lucas: Yeah, and Brazil's story is different — it's more about commodity prices and fiscal concerns. But the common thread is the dollar and geopolitical risk. When Iran and Israel exchange strikes, every risk asset gets hit. The VIX probably spiked — we don't have the number, but you can bet it did. Luna: I want to stay on the divergence point because I think it's the most actionable for listeners. If you're an EM investor, you can't just buy EEM and forget it. You have to pick your spots. Which markets are you watching right now? Lucas: I'm watching India and Saudi Arabia as relative safe harbors. India has a strong domestic demand story, a reform-oriented government, and it's less tied to the global trade cycle. Saudi Arabia benefits from oil and its Vision 2030 diversification. But I'm also watching Korea for a potential bottom — if the political situation stabilizes and global trade picks up, Korea could rebound sharply because it's been oversold. Luna: Speaking of useful frameworks — if today's episode has helped you think about EM investing more clearly, this podcast stays ad-free thanks to listener support. You can help keep it going at buy me a coffee dot com slash fexingo. No pressure, just a heads up. Lucas: Yeah, we really appreciate those who chip in. It lets us keep digging into topics like this without any sponsor influence. So thanks if you do. Luna: Alright, back to the flows. One thing I find interesting is that China's onshore market — the Shanghai Composite — is actually up slightly this week. That's partly because Chinese authorities have been tightening capital controls, which limits outflows. But it's also because Chinese stocks are cheap relative to history. The P/E on MCHI is around 11, compared to 15-20 for other EM. Lucas: That's a classic value trap argument though. Cheap stocks can get cheaper. And Chinese tech is under regulatory pressure and geopolitical scrutiny. But you're right — the divergence between Korea and China is stark. Korea's EWY is down 19%, China's FXI is down less than 2%. That's a 17 percentage point gap in one week. Luna: So what should a listener do with this information? If they're holding EM ETFs, do they sell everything, or do they rotate? Lucas: I think the most prudent approach is to distinguish between cyclical selloffs and structural ones. Korea's selloff looks cyclical — it's tied to trade and politics. If those reverse, Korea could bounce. Brazil's selloff might be more structural because of fiscal issues. So I wouldn't sell everything, but I'd be underweight the most exposed markets and overweight the ones with domestic demand buffers. Luna: And keep an eye on the dollar. If the dollar weakens — which could happen if the Fed pivots or if geopolitical tensions ease — that would be a huge tailwind for all EM. Lucas: Exactly. The dollar index is still near 119. If it breaks below 115, that could be the signal for a broader EM rally. Until then, we're likely to see more volatility and more divergence. Thanks for listening, and we'll be back tomorrow. Luna: Take care, everyone.