Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How AI Data Centers Are Reshaping Emerging Market Energy Demand
Transcript
- Lucas: So, Luna, everyone talks about AI in terms of chips and software. But there's this other conversation happening underneath, about power. And that's where I think emerging markets are starting to feel the real pressure. Luna: You mean the electricity demand from data centers, right? I've seen the headlines about 'AI data center outrage' — sounds like a real issue. Lucas: Exactly. We're at a point where a single large data center can draw as much power as a small city. And as the US and China race to build out AI capacity, the energy has to come from somewhere. That's pulling in emerging markets in some pretty specific ways, and it's showing up in the market data. Luna: Well, I'm intrigued. And, you know, before we dive deeper, I have to say — if walking through the economy with us has ever made something click for you, we'd be grateful if you'd consider supporting the show. You can do that at buy me a coffee dot com slash fexingo. It keeps us ad-free and we get to keep digging into these stories. Lucas: Yeah, that's the kind of thing that lets us keep doing this. And speaking of digging in, let's look at today's numbers. The dollar index has been drifting lower, down to about one hundred eighteen point nine, and the yuan is holding steady at around six point seven four per dollar. That's a pretty stable setup for emerging markets overall. Luna: Stable, but the moves are all over the place. China's FXI is up over two percent in five days, while Taiwan's EWT is down almost three percent. That seems like a big divergence for a region that's usually correlated. Lucas: Right. And that's exactly the kind of split we've been seeing. The AI trade is separating winners from losers within emerging markets. Taiwan is the classic AI hardware play — it's got the foundries and the packaging. But its market is down while China's internet giants are rallying. Let's unpack that. Luna: Sure, because I thought Taiwan would be a natural beneficiary of all this AI capex. What's going on? Lucas: Well, the money is moving from hardware to software, at least in the near term. Look at the big Chinese names: Alibaba is up almost five percent in five days, PDD up over five percent. Those are cloud and e-commerce platforms that are integrating AI into their services. The market is rewarding them for monetization potential, not just for building out physical capacity. Luna: But then Baidu is down eleven percent. I thought they were the AI pioneer in China. Lucas: They were, and they still have that narrative. But the stock is getting hit, probably on concerns about their AI spending versus actual revenue, or maybe on competitive pressure from the bigger players. It's a reminder that being the first mover isn't enough if the market doesn't see a clear path to profits. Luna: So the AI trade is really about earnings, not just technology. That goes back to the broader point that emerging markets are splitting into AI winners and commodity plays, like we've talked about before. Lucas: Exactly. And now we're seeing energy demand come into the equation. Data centers need not just chips, but also power and cooling. That's where countries with abundant energy resources or those that can build out grid infrastructure start to look interesting. Luna: Who's positioned for that? Brazil comes to mind, with its hydro and renewables, but its market is only up point six percent. Is that a sign that the market isn't seeing it yet? Lucas: Could be. Brazil's EWZ is up a bit, but nothing dramatic. That might be because the energy link is still speculative. For now, the direct beneficiaries are the ones building the data centers, like the big tech companies and their suppliers. But if you're thinking about the next phase, countries like Brazil or even Chile with its lithium and copper could become more important. Luna: And what about the US dollar? We mentioned it's easing a bit. That usually helps emerging markets overall, but it's not lifting every boat equally. Lucas: Right. The dollar is down from about one hundred nineteen to one hundred eighteen point nine on the trade-weighted index. That's a modest move, but it can provide some breathing room for countries that borrow in dollars. However, the bigger story is the structural split based on AI exposure and energy resources, not just currency movements. Luna: And we can't ignore the trade data. The US trade deficit narrowed a bit in June, from about seventy-seven point six billion to seventy-three point three billion. That suggests some rebalancing, but what does it mean for emerging markets? Lucas: It's a mixed signal. On one hand, a narrower deficit might mean the US is importing less, which could hurt exporters. But on the other hand, the current account deficit is still widening — it's at about two hundred twenty-six point eight billion on a monthly basis, down from two hundred twenty-one billion. So the overall picture is still one of global imbalances, and emerging markets are the other side of that trade. Luna: So even as the dollar eases, the structural issues remain. That's the background for why we're seeing such divergent performance across emerging markets. Lucas: Precisely. And I think the new layer here is energy. We're moving from a split between AI and commodity plays to a more specific divide: countries that can supply the power and infrastructure for AI versus those that can't. That's going to be a key theme over the next few years. Luna: Can you give a concrete example of a country that's on the right side of that divide? Lucas: Well, look at Saudi Arabia. They've been building out their data center capacity and investing in AI as part of their Vision 2030 plan. They have the energy resources and the capital to attract hyperscalers. That's a deliberate strategy to position themselves as a regional AI hub. Luna: And what about a country that might be on the wrong side, like Taiwan? They have the tech but they're energy-constrained, and they're also dealing with geopolitical risks. Lucas: Exactly. Taiwan has the know-how, but it lacks domestic energy resources and relies on imports. Plus, its power grid is already strained. That's a vulnerability that the market is starting to price in, even as the AI boom continues. Luna: So the market is basically rewarding countries that can both innovate and power that innovation. That's a pretty profound shift. Lucas: It is. And it's happening at a time when the US Treasury is trying to tamp down yields, which is causing some turbulence in developed markets. But emerging markets are increasingly driven by their own fundamentals, not just by what the Fed does. Luna: That's a good segue. With the Dow down six hundred points on the Treasury plan, that doesn't seem to be spilling over into emerging markets today. Lucas: Right, the EEM and VWO are basically flat to slightly down. But the divergence is internal. China is up, Taiwan is down, and that's really the story. The ai energy nexus is creating a new map of winners and losers, and it's not the same as the old tech versus commodity split. Luna: So for investors, what's the takeaway? If I'm looking at emerging markets, how do I think about this? Lucas: I'd say look beyond the headline indexes. The old-style emerging market ETF is going to give you a blend of everything, but the real action is in the individual stories. Ask yourself: does this country have the energy, the infrastructure, and the policy support to participate in the AI build-out? That's going to be the differentiator. Luna: And it's not just about having the resources — it's about being able to integrate them into a global supply chain. That's where the complexity comes in. Lucas: Exactly. It's a systems play. You need the power, the grid, the data center, and the software ecosystem. Very few countries have all of that. The ones that do are the ones that are going to attract the capital. Luna: And the ones that don't might fall further behind. That's a real risk for some of the smaller emerging markets. Lucas: Absolutely. But it's also an opportunity. Because as the AI race heats up, there's going to be a huge demand for energy and infrastructure. And emerging markets are where a lot of that capacity will be built. The question is which ones will be ready. Luna: Speaking of readiness, what should we be watching in the next few months to see if this theme plays out? Lucas: I'd watch the earnings reports from the big Chinese tech companies, especially around cloud and AI services. But also keep an eye on capital flows to countries like Brazil and Chile, where energy and minerals are the draw. If you see sustained investment there, that's a sign the market is rewarding the energy side of the AI trade. Luna: So the infrastructure build-out is just as important as the software. That's a helpful way to frame it. Lucas: And it's a longer-term story. It's not going to be resolved in a quarter or two. But the foundations are being laid right now, and the market is starting to price it in. The question is whether today's winners can sustain their lead, or if new players will emerge as the energy demands grow. Luna: That's a great point to leave listeners with. As always, we'll be tracking this closely. Thanks for joining us, and until next time, keep your eyes on the power grid.