Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Indonesia and Taiwan Are Outperforming Emerging Markets
Transcript
- Lucas: So here's a number that stopped me this week. Indonesia's market, the EWY ETF, is up four percent in five days. Taiwan's up four point four. Meanwhile China's big internet names are drifting lower — Alibaba down slightly, JD down two percent. That's a striking split within Asia alone. Luna: And it's not just a five-day blip, right? This has been building for months. Lucas: Exactly. We've talked before on this show about emerging markets decoupling into two camps — the AI plays and the commodity plays. But what Indonesia and Taiwan show is that the line between those two camps is blurring. Taiwan is obviously the AI hardware story, but Indonesia is increasingly a beneficiary of the AI supply chain too, through the metals and energy that go into all that infrastructure. Luna: So it's not just two separate lanes. It's more like two ends of the same supply chain. Lucas: Right. And that's why I wanted to dig into this today. Because if you look at the big emerging market ETFs, the iShares one, EEM, is up one and a half percent over the week. Vanguard's VWO is up one point three. So the broad indexes are fine, but the real action is in the specific countries that sit at the intersection of tech and resources. Luna: Let's start with Indonesia, because I think a lot of listeners have a vague sense that it's a big commodity exporter, but not much more. What's actually driving that four percent? Lucas: So first, the commodity angle. Indonesia is the world's largest exporter of nickel, and nickel is critical for EV batteries and for stainless steel. But it's also a big exporter of coal, palm oil, and increasingly copper. And with the global push to electrify everything, the demand for those materials is structural, not just cyclical. This week, we saw the trade-weighted dollar ease slightly, down to 118.1 from 118.25, and that's a tailwind for commodity exporters because their goods become cheaper for foreign buyers. Luna: So a slightly weaker dollar helps. But is there something specific happening in Indonesia beyond just commodity prices? Lucas: There is. The government under President Prabowo has pushed a 'downstreaming' policy — they want to process minerals domestically instead of just shipping raw ore. That's creating a whole new industrial base, and foreign investment has been flowing into nickel smelting and battery plants. It's a shift from being a raw material exporter to a manufacturer, and that's a long-term re-rating story for the market. Luna: But that's been going on for a couple of years now. Why would the market suddenly jump four percent in a week? Lucas: Part of it is probably the broader risk-on mood in emerging markets. And there's also the fact that Indonesia's central bank has been relatively dovish compared to the Fed. With the US dollar stabilizing, that's supportive for the rupiah and for foreign investors looking for yield. But I think the bigger story is that Indonesia is being discovered as a pure-play on the energy transition — not just in EVs, but in solar, wind, and grid infrastructure, all of which need nickel, copper, and aluminum. Luna: And then Taiwan is the other side. That four point four percent jump is even more striking. What's driving that? Lucas: Taiwan is essentially the hardware backbone of the AI trade. It's where the most advanced semiconductors are made — TSMC, MediaTek, all those names. When we see AI data centers being built at record pace around the world, the demand for their chips is insatiable. So the market is pricing in both the current wave of AI spending and the expectation that it's only going to accelerate. Luna: And there's also a geopolitical angle, right? With all the tensions around China, Taiwan's strategic importance has only grown. Lucas: Absolutely. But interestingly, the market reaction to geopolitical headlines has been muted lately. Investors seem to have baked in a certain level of risk and are focused more on earnings. The Taiwan ETF's top holdings are TSMC, the chip equipment maker ASE, and a few others — and they've been beating expectations. So it's less about politics and more about the fundamentals of the AI supply chain. Luna: So if we zoom out, what does this say about the broader emerging market landscape? We've been talking about the split between AI and commodity plays for a while. But now we're seeing countries that are both. Lucas: Right. And I think that's the key insight. The old dichotomy was: you're either a tech exporter or a commodity exporter. But increasingly, the most attractive markets are those that straddle both. Indonesia has the minerals and the manufacturing ambitions. Taiwan has the chips and the engineering talent. They're both plugged into the same global growth engine — the energy transition and AI — just at different points. Luna: And the market is rewarding that. I mean, just look at the numbers: EWY up four, EWT up four point four, while China's FXI is down point three. That's a huge divergence within the same region. Lucas: And it's not just this week. If you look at year-to-date, Taiwan and Indonesia have been among the best performing emerging markets, while China has been lagging. So this is a persistent trend, not a one-off. Luna: What about the other big emerging markets? Brazil is up slightly, India is up slightly. They're not participating in the same way. Why? Lucas: Brazil is more of a domestic consumption and commodity story, but it's also been hit by political uncertainty and a split between state-owned and private companies. India is growing fast, but it's expensive — the market is already priced for perfection. So investors seem to be rotating toward markets that are cheap, growing, and exposed to the AI/energy theme. Indonesia and Taiwan check those boxes. Luna: So for someone listening, how do they play this? Is it just buying the EWY and EWT ETFs? Lucas: Well, that's the simplest way. But I'd caution against just chasing the weekly momentum. Instead, think about the underlying drivers. If you believe in the energy transition, Indonesia's downstreaming story is a long-term play. If you believe in AI, Taiwan is a core holding. But both carry specific risks — currency risk, geopolitical risk, and in Taiwan's case, concentration risk because it's so heavy in semiconductors. Luna: And there's also the question of valuations. Are these markets getting expensive after this run? Lucas: Taiwan's main index trades at a premium to the emerging market average, but it's supported by earnings growth. Indonesia's market is still relatively cheap, with a forward price to earnings ratio in the mid-teens. So it's not a bubble, but it's not a bargain either. It's all about whether the earnings can keep up. Luna: And speaking of earnings, we should mention that this week's macro backdrop — the Federal Reserve's hawkish tone and the possibility of another rate hike — hasn't really hurt these markets. Why is that? Lucas: That's a great point. Kevin Warsh gave a hawkish speech at Jackson Hole, and the S&P 500 fell. But emerging markets, in aggregate, were actually up. That's partly because a stronger dollar isn't as much of a headwind as it used to be. Many EM countries have built up their foreign reserves and reduced their dollar-denominated debt. So they're more resilient to Fed tightening. And in the case of Indonesia and Taiwan, their growth stories are strong enough to override the macro drag. Luna: So the old decoupling narrative — that EM stocks suffer when the Fed hikes — is not as true as it once was. Lucas: Exactly. And that's a big deal for investors. It means you can't just paint emerging markets with one brush. You have to look at the specific country, its fiscal position, its export mix, and its structural growth drivers. That's the new playbook. Luna: And if this episode is helping you make sense of that playbook, then it's doing its job. And if you want more of that, the way we keep these shows ad-free is through listener support. You can buy us a coffee at buy me a coffee dot com slash fexingo. It really helps. Lucas: Yeah, and it genuinely makes a difference. Thanks to everyone who's already contributed. Now, back to the markets — one thing I want to stress is the importance of not overreacting to a single week's returns. The four percent move in Indonesia is eye-catching, but it's part of a longer trend. The same goes for Taiwan. So the question is: can these markets sustain their momentum? Luna: What would you say are the key things to watch over the next few months? Lucas: For Indonesia, watch the pace of downstreaming investment. If new smelters and battery plants come online as planned, that's a positive signal. Also watch the rupiah — if it stays stable, that supports foreign inflows. For Taiwan, the key is the semiconductor cycle. If AI spending continues to ramp up, TSMC's guidance will be the bellwether. Any sign of a slowdown there would hit the market hard. Luna: And what about the geopolitical risk? A conflict in the Taiwan Strait would be catastrophic, but the market seems to be ignoring it. Is that rational? Lucas: It's a classic risk paradox. If you fully priced in a tail risk, you'd never invest in Taiwan at all. So investors tend to ignore it until it becomes more probable. That's risky, but it's also why Taiwan trades at a discount to its fundamental value. You're being compensated for that risk. The same logic applies to Indonesia to a lesser extent. Luna: So one last question: for someone building an emerging market portfolio, how much weight should they give to these two markets? Lucas: It depends on their risk tolerance and their view on AI. If you're bullish on AI, Taiwan is a core holding. If you want a more diversified play on the energy transition, Indonesia is a good satellite. But I wouldn't put all your eggs in one basket. The beauty of emerging markets is that you can spread your bets across countries with different drivers. That's what the ETFs allow you to do. Luna: And there's no shortage of countries to choose from. It's a big world. Lucas: It is. And that's what makes this asset class so fascinating. The dispersion is huge, but so is the opportunity. As always, do your own research, and maybe talk to a financial advisor. But today, at least, the data is telling us that Indonesia and Taiwan are the places to watch. Luna: I'm definitely going to be keeping an eye on those two over the next few months. Thanks for breaking it down, Lucas. Lucas: Anytime. That's all for today. We'll see you next time.