Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Emerging Market Tech Giants Are Outperforming the Indexes
Transcript
- Lucas: So Luna, we talk a lot about the divergence between emerging markets, but this week the split is happening inside a single country. China's internet giants are ripping higher while the broad ETFs are basically flat to down. Luna: I saw that. Alibaba and PDD are up five and six percent respectively over the past week. But the EEM is down nearly a percent. That is a huge gap. Lucas: It is. And it's not just a one-week blip. If you look at the month, the KWEB ETF is up roughly one and a half percent, while the broader China ETF, MCHI, is up a bit more at one point eight. But the real story is the individual names. Luna: What's driving it? Is this AI optimism again? Lucas: Partly. But it's more nuanced. Alibaba has been repositioning itself around AI infrastructure, and the market is starting to price that in. PDD, on the other hand, is more about consumer strength and international expansion. Both are benefiting from a narrative shift. Luna: So it's not a single catalyst, but a couple of different stories converging. Lucas: Exactly. And that's what makes it interesting for investors. If you own the index, you're getting a mix of everything — including some laggards like Baidu, which is down over eleven percent this week. That drags down the overall performance. Luna: That's a big drop for Baidu. What's going on there? Lucas: It looks like the market is questioning their AI strategy. They've been investing heavily, but the payoff isn't as clear as it is for Alibaba. So you have this bifurcation: the AI winners are getting rewarded, and the ones that are perceived as falling behind are getting punished. Luna: So if someone is invested in the EEM or VWO, they're not really capturing this move. They're getting diluted by the laggards. Lucas: Right. And that's been a theme in emerging markets for a while now. You have to be selective. The broad brush approach isn't working as well as it used to. Luna: Is this just a China story, or are we seeing this in other emerging markets too? Lucas: It's happening everywhere. Look at India — the INDA ETF is down slightly this week, but within that, there are tech and financial names doing well. Brazil, same thing. The EWZ is up one and a half percent, but it's concentrated in a few heavyweights. Luna: So the index is becoming less representative of what's actually happening in the market. Lucas: It's a tool, but a blunt one. If you're looking for growth, you might want to tilt toward the sectors that are driving the gains. If you want stability, you might look at the dividend payers. The point is, you have to be intentional. Luna: Let's talk about the macro backdrop. The dollar has weakened slightly, and the yuan is stable. That's probably helping the China tech story. Lucas: Yeah, a stable currency helps attract foreign investment, and a weaker dollar eases financial conditions globally. That's a tailwind for risk assets, including emerging market tech. Luna: And the trade balance is improving. The deficit narrowed from seventy-seven billion to seventy-three billion. That's a positive signal for the region. Lucas: Good point. That suggests demand for emerging market exports is holding up, which supports the overall growth narrative. But again, the market is focusing on the tech names. Luna: So if I'm an investor, how do I play this? Do I buy the individual stocks, or do I stick with the ETF? Lucas: It depends on your risk tolerance and your time horizon. If you're comfortable with single-stock volatility, the upside could be significant. But you have to do your homework. If you prefer a more diversified approach, maybe look at an ETF that focuses on the internet sector, like KWEB, rather than the broad market. Luna: That's a good middle ground. You get the tech exposure without the idiosyncratic risk of one company. Lucas: Exactly. And I should note, this isn't just about China. The same logic applies to other emerging markets. Look for the sectors that have a clear growth driver — AI, consumer, maybe even some commodity plays if you're bullish on the global cycle. Luna: Well, speaking of getting value from our analysis, if today was actually useful to you, the way these stay ad-free is listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. It helps us keep doing this deep dive for you. Lucas: Yeah, that's the only way we keep this going. We appreciate the listeners who chip in. Now, back to the markets — what about the Fed minutes that came out today? They hinted at a possible rate hike if inflation doesn't cool. Luna: That could be a headwind for emerging markets. Higher US rates tend to pull capital back to the US. Lucas: Right, but the market seems to be looking past that for now. The dollar is actually down a bit, and Treasury yields pulled back after the Treasury announced they'd double the size of their debt repurchases. That's giving risk assets some room to breathe. Luna: So the macro picture is supportive, but the real story is the micro — the specific companies that are executing well. Lucas: Exactly. And that's what we're seeing with Alibaba and PDD. They're not just riding a wave; they're doing things that create value. Alibaba's AI cloud business is growing, and PDD's Temu expansion is gaining traction. Those are fundamental drivers. Luna: It's a good reminder that emerging markets are not a monolith. You have to dig deeper. Lucas: For sure. And as we head into the fall, it'll be interesting to see if this divergence continues. If the Fed does hike, we could see a rotation out of growth and into value. That would hit these tech names. Luna: So the next few months could be pivotal for these stocks. Lucas: They could. But for now, the market is rewarding companies that are laser-focused on AI and consumer growth. That's the trade.