Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Emerging Markets Are Diverging in 2026
Transcript
- Lucas: So, we are now well into 2026, and if you look at the emerging markets space, there is one word that really captures what is happening: divergence. Luna: Divergence in what sense? Because the headlines often just say 'emerging markets are up' or 'down', but the reality is a lot more granular. Lucas: Exactly. Take this past week alone. The iShares MSCI Emerging Markets ETF, ticker e e m, is up about 3 percent over five days as of June 2. But that headline number hides enormous variation. Luna: So where is the strength, and where is the weakness? Lucas: South Korea is the standout. The iShares MSCI South Korea ETF, ticker e w y, surged over 7 percent in the same period. That is massive for one week. Meanwhile, Brazil's EWZ — the iShares MSCI Brazil ETF — fell about 1.4 percent. Luna: So nearly an 8.5 percentage point gap just between those two. That is not a uniform EM story at all. Lucas: Right. And the driver for South Korea is clearly semiconductors and AI. The global demand for AI chips and memory is still accelerating, and South Korea's SK Hynix and Samsung are at the center of that supply chain. Luna: Whereas Brazil is more tied to commodities and fiscal concerns. The agribusiness boom has been helping, but the currency has been under pressure, and the market is pricing in some political risk. Lucas: Precisely. And that commodity versus tech divide is really the big structural story this year. But there is also a third group: countries that are benefiting from supply chain shifts away from China. Luna: You mean Vietnam, India, maybe Mexico? Lucas: Vietnam is a great example. It is not a huge weight in broad EM indexes yet, but its manufacturing exports are growing rapidly. The iShares MSCI Vietnam ETF is not one of the big liquid ones, but the country story is gaining traction. Luna: And China itself? The FXI and KWEB have been up this week, but it is still a contested space. Lucas: China tech had a decent week — the KWEB, which tracks Chinese internet stocks, was up 5 percent. But that comes after a lot of volatility. The regulatory environment and geopolitical tensions mean China trades on headlines more than fundamentals right now. Luna: So for an investor, how do you even think about allocating to EM in this environment? Do you just buy the broad ETF and hope the winners offset the losers? Lucas: That is the traditional approach, and it has worked over long periods. But this year, the dispersion is so high that a broad fund like EEM or VWO might give you a muted return while individual country ETFs swing wildly. Luna: Which is why we are seeing more investors pick country-specific ETFs or even single-stock exposures, especially in South Korea and Taiwan. Lucas: Absolutely. And the other factor is the dollar. The strong dollar has been a headwind for EM debt and imports, but for countries with strong export sectors — like South Korea — a weaker won can actually boost competitiveness. Luna: The yen has also weakened again, with the dollar at around 159 yen. That puts pressure on some Asian currencies but helps exporters in Japan and Korea. Lucas: Exactly. So the EM story in 2026 is not one story. It is many. And the key is understanding which countries are aligned with the big global themes: AI, reshoring, commodities, and demographics. Luna: And on that last point, demographics, India is often talked about as the next China. Its market is up this year, but not as dramatically as Korea. Lucas: India is a long-term play. The INDA ETF is down slightly this week, but over a multiyear horizon, its demographic dividend and reform momentum make it a compelling story. The challenge is that valuations are not cheap. Luna: So what about Taiwan? It is not in the data we have today, but it is a huge weight in many EM indexes. Lucas: Taiwan Semiconductor, T-S-M-C, is the single largest holding in many EM ETFs. And it has been a massive beneficiary of AI demand. But there is also geopolitical risk, which keeps a lid on valuations. Luna: Which brings us back to the core theme: you cannot paint EM with one brush. You have to look at the specific drivers for each country. Lucas: And that is exactly what we try to do on this show. If walking through the economy with us has made something click for you, we want to keep this content ad-free and listener-supported. If today was useful, you can help by visiting buy me a coffee dot com slash fexingo. Luna: Yeah, it really does make a difference. Just a small gesture helps us keep bringing you these deep dives without any corporate sponsorship. Lucas: So back to the divergence theme. One country we have not talked about that deserves attention is Poland. It has been one of the better-performing EM economies this year, with GDP growth outpacing many peers. Luna: Poland benefits from its proximity to Western Europe, strong manufacturing, and EU funds. It is almost a developed market in some ways. Lucas: Exactly. And that is the other dimension of divergence: some EM countries are converging with developed market standards, while others are stuck in low-growth traps. Luna: So for our listeners, what is the one takeaway from this episode? Lucas: Do not treat emerging markets as a monolith. Look at the specific themes — AI, commodities, reshoring, demographics — and see which countries align with them. That is where the opportunity is. Luna: And stay tuned for our next episode, where we will dive deeper into one of these themes.