Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / The US-Korea Tech Stock Link Is a Risk for EM Investors
Transcript
- Lucas: So Nasdaq futures are sliding this morning after a sell-off in Asian semiconductor stocks. And that's not just a headline — it's actually the latest sign of a deeper link between U.S. and Korean tech stocks that's becoming a real risk for emerging market investors. Luna: You're talking about that CNBC piece this morning — the one that says U.S. and Korean tech stocks are now tightly linked. I thought Korea was supposed to be an emerging market, but it's behaving like a satellite of the NASDAQ. Lucas: Exactly. And the numbers this week make it really stark. The iShares MSCI South Korea ETF, ticker symbol e w y, is down nearly seven percent in the last five days. That's a massive move for a country-weight ETF. Meanwhile, the broader emerging market ETF EEM is down about two and a half percent. So Korea is dragging the whole EM space lower. Luna: Is it just semiconductors driving that? I mean, Samsung and SK Hynix together are like thirty percent of the Korean market cap. Lucas: That's exactly it. Korea's stock market is effectively a semiconductor proxy. When Samsung Electronics sneezes, the whole index catches a cold. And this morning, Asian chip stocks were down across the board — Taiwan's TSMC, Japan's Tokyo Electron, you name it. So the correlation with U.S. tech, especially the Philadelphia Semiconductor Index, has been climbing all year. Luna: And that correlation is a problem for anyone who thought they were diversifying by buying emerging markets. If Korea moves in lockstep with U.S. tech, you're not getting the diversification benefit you think you are. Lucas: Right. The whole pitch for emerging markets has always been lower correlation with developed markets. But when you look at the rolling 90-day correlation between the KOSPI and the NASDAQ, it's now above 0.7. That's near historic highs. So the 'decoupling' narrative that people talked about for years — where EM growth would be driven by domestic demand, not exports — that's fading, at least for tech-heavy markets. Luna: And it's not just Korea. Taiwan's market is similarly correlated. INDA, the India ETF, is flat, but that's because India's tech exposure is more services than hardware. The correlation risk is really concentrated in East Asian export economies. Lucas: Which brings us to the currency dimension. The yen weakened to 163.7 per dollar this week, and the Korean won has been under pressure too. A weaker won helps exporters like Samsung, but it also means that U.S. dollar-based investors in the EWY ETF are getting a double whammy — falling stock prices and a currency that's depreciating against the dollar. The trade-weighted dollar index is actually down a bit, at 120.7, but the yen and won have been sliding faster than the dollar's broad index would suggest. Luna: So the currency risk amplifies the equity risk. That's a tough combination for anyone who bought Korean stocks as a way to play the global chip cycle. Lucas: And the cycle itself is getting more uncertain. We've seen a huge boom in ai related chip demand over the past two years, but there are now signs of inventory build-up in memory chips. SK Hynix reported strong earnings last quarter, but guidance was more cautious. If the semiconductor cycle turns, Korea's market could correct much harder than U.S. tech, because it lacks the diversified revenue base that, say, Microsoft or Apple have. Luna: Interesting you mention Apple — they just overtook Nvidia as the world's most valuable company. That's a shift from hardware to a more diversified business model. Korean chips are still very cyclical. Lucas: Let's zoom out for a second. Among the big emerging market ETFs this week, the contrast is telling. The China ETF, FXI, is actually up one point nine percent over the past five days. That's partly because China's tech companies are more consumer-facing — Alibaba, JD.com, Baidu. They're not as tied to the global chip cycle. So we're seeing a divergence within emerging markets: East Asian export economies are getting hammered by the U.S. tech correlation, while domestic demand driven markets like China and India are holding up better. Luna: And EWZ, Brazil, is up slightly. That's a commodity story, not a tech story. So the old 'EM is a monolith' view is really breaking down this week. Lucas: Exactly. If you're an investor who just owns VWO, the broad emerging market ETF, you're getting hit by the Korea exposure. VWO is down one point one percent over five days. But if you had overweighted China or India, you'd be in positive territory. The correlation risk is actually a sector allocation risk in disguise. Luna: So what's the takeaway for listeners? Should they avoid Korean stocks altogether? Lucas: Not necessarily. But they need to recognize that buying EWY is essentially making a directional bet on the U.S. tech sector and the global chip cycle, with currency risk on top. If you already own a lot of U.S. tech in your portfolio, adding Korea doesn't diversify you — it doubles down. You might be better off looking at EM markets with lower tech correlation, like Indonesia or Mexico. EWW, the Mexico ETF, is up almost one percent this week, and that's driven by nearshoring and manufacturing, not by chips. Luna: And speaking of which, I know this is a bit of a tangent, but it's related — a couple of dollars a month is genuinely what keeps shows like this going. If walking through the economy with us has made something click, you can support the podcast at buy me a coffee dot com slash fexingo. It's a small thing, but it really does make a difference in keeping these episodes ad-free and independent. Lucas: Yeah, Luna's right. That kind of listener support is what lets us dig into angles like this instead of just reciting headlines. So if you've gotten value out of the show, consider it. Anyway, back to the correlation — one thing that could break this link is if Korean domestic demand picks up significantly, but that requires structural reforms and higher household income, which take years. Luna: Or if the U.S. tech cycle enters a downturn and Korea's semiconductor companies get sold off even more aggressively. That correlation actually increases during sell-offs because both markets are driven by the same risk-on, risk-off sentiment. Lucas: Right. And we saw a preview of that this morning with the Asia chip sell-off. The question is whether this is a temporary positioning flush or the beginning of a deeper correction. For now, the VIX is still relatively low, but the moves in individual stocks are telling. Samsung Electronics is down about four percent this week alone. If that continues, it pulls the whole Korean market down, and that spills into EM ETFs. Luna: Let's talk about the currency side again. The won has weakened past 1,400 per dollar. That's a psychological level. The Bank of Korea has been intervening but they can't fight the global dollar strength forever. And with the Fed holding rates higher for longer, emerging market currencies are under pressure generally. Lucas: Although the trade-weighted dollar index has actually dipped a bit to 120.7, so it's not a uniform dollar strength story. It's more that the yen and won are weakening relative to other currencies. That might reflect the specific export exposure of those economies. Japan and Korea compete in similar export markets — cars, electronics, semiconductors. So a weak yen is forcing Korea to keep its currency weak too, to stay competitive. Luna: That's a classic competitive devaluation dynamic. And it makes the central banks' jobs harder because they want to fight inflation but also can't afford to let the currency strengthen too much. Lucas: So where does that leave the emerging market investor? I think the key lesson is to look under the hood of your EM exposure. The era of 'just buy EEM and forget it' is over — if it ever really existed. You need to understand what economies and sectors you're actually betting on. Korea is a tech bet. Brazil is a commodity bet. China is a consumer and policy bet. They're not the same thing. Luna: And the correlation between U.S. tech and Korean tech is likely to persist as long as the global semiconductor industry is dominated by a few players and as long as AI demand drives the cycle. That could be years. Lucas: Exactly. So for today's episode, the concrete takeaway is this: if you own the Korea ETF, EWY, understand that you're getting a concentrated exposure to the global chip cycle with significant currency risk. And if you're looking for genuine diversification, consider markets like India or Mexico that have lower tech correlations. Thanks for listening — we'll be back tomorrow with another angle on the emerging markets story. Luna: See you then.