Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why South Korea Is the Standout Emerging Market in 2026
Transcript
- Lucas: So South Korea's main ETF — the EWY — is up nearly eight and a half percent over the past five days. That's the best performer in the broad emerging markets basket by a wide margin. Luna: And that's while a lot of other EM funds are either flat or down. The iShares Core MSCI Emerging Markets ETF, VWO, is up just half a percent. China's FXI is down. Lucas: Right. So the question is: why Korea? And I think the answer starts with one thing — memory chips. Specifically, the high-bandwidth memory chips that power AI data centers. Luna: And the dominant player there is SK Hynix. They've basically cornered the market for HBM — high-bandwidth memory — which is essential for training large language models. Lucas: Exactly. And we've seen this before — when AI demand spikes, Korea's semiconductor exports spike with it. But there's a nuance this time. The strong dollar has historically been a headwind for EM stocks, but Korea's export machine seems to be shrugging it off. Luna: Yeah, the won has weakened a bit — it's at about 159 to the dollar — but not nearly as much as other EM currencies. And a weaker won actually helps Korean exporters by making their goods cheaper globally. Lucas: That's the classic trade-off. You get a boost to export competitiveness, but at the cost of imported inflation. For a country that imports a lot of energy and raw materials, that can be a problem. But Korea's trade surplus has actually been widening. Luna: And before we go deeper — if you're finding this kind of analysis useful, you know, we keep the show ad-free and listener-supported. If today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. No pressure, but it really helps. Lucas: Yeah, absolutely. It's a small gesture that goes a long way. And we appreciate everyone who's ever tossed something in the jar. Luna: Alright, back to Korea. So the trade surplus — what's driving that? Lucas: Well, exports of goods and services are up — the latest data shows about three point five trillion dollars annualized — and imports are also up, but the gap is narrowing. The trade deficit has shrunk from about sixty billion to around fifty-seven billion in the latest month. Luna: And a big chunk of that is semiconductor exports. In May, Korea's chip exports were up over 40% year-over-year. That's a massive tailwind. Lucas: It is. And it's not just SK Hynix. Samsung is also a major player, though they've been struggling a bit more with the high-end HBM market. But the entire ecosystem benefits — the equipment makers, the materials suppliers, even the logistics firms. Luna: So when you look at the EWY ETF, what's in it? It's heavily tech-weighted, right? Lucas: Very. Samsung and SK Hynix together account for about a third of the fund. Then you've got some financials, some auto stocks like Hyundai and Kia, but tech is the engine. And with AI demand showing no signs of slowing, that engine is running hot. Luna: But there's a risk, isn't there? If we get a correction in AI stocks — say, if the Stargate data center buildout slows or if there's a regulatory crackdown — Korea's market could drop just as fast. Lucas: Absolutely. And that's the single-stock concentration risk. The EWY is basically a bet on Samsung and SK Hynix. If those two stumble, the whole ETF gets hit. We saw that in 2022 when memory chip prices collapsed. Luna: Right, the cyclical nature of the memory market. But this time it feels different because the demand is driven by AI, not just consumer electronics. Lucas: That's the bull case. AI models are insatiable for memory bandwidth. Every new generation of HBM — from HBM2 to HBM3 to HBM3E — requires more chips per GPU. And SK Hynix is the market leader in the latest generation. Luna: NVIDIA is their biggest customer, right? For the H100 and B200 GPUs? Lucas: Exactly. And NVIDIA's dominance in AI accelerators means SK Hynix has a captive, growing market. That's a powerful tailwind. Luna: But there's another angle — Korea's relationship with China. A lot of Korean exports used to go to China, but that's been shifting. How does that play into the story? Lucas: It's actually a positive right now. Korea's exports to China have been declining as China localizes its supply chain, but Korea has been diversifying to the US and Europe. And with the US Inflation Reduction Act and the CHIPS Act, Korean semiconductor firms are building factories in America, which gets them closer to the end market. Luna: So less dependence on a slowing Chinese economy is actually a good thing for investors. Lucas: Exactly. And the won's relative stability versus the yuan helps too. The yuan has been weakening against the dollar — it's at about 6.79 per dollar — but the won has held up better. That makes Korean exports more competitive in third markets. Luna: So the macro picture lines up: strong AI demand, favorable currency, diversifying trade partners. But what about valuations? Is this already priced in? Lucas: The KOSPI is trading at about 12 times forward earnings. That's not cheap, but it's not bubbly either. The P/E ratio for the EWY is around 11.5, which is in line with its five-year average. So there's room for earnings growth to drive returns. Luna: And earnings are growing. SK Hynix just reported record quarterly profits in April. Lucas: They did. Operating profit more than tripled year-over-year. And guidance suggests that momentum continues into the second half of 2026. Luna: But there's a geopolitical wildcard — North Korea. Any escalation there would hit the market hard. Lucas: That's the perennial risk. But markets have become somewhat habituated to the rhetoric. The real tail risk is a conflict that disrupts supply chains. That said, for now, the market is focused on fundamentals. Luna: So for someone looking at their portfolio, is the EWY a buy here? Or is it too late after the 8% week? Lucas: I think it depends on your time horizon. If you're betting on AI for the next three to five years, Korea is one of the best pure plays. But if you're a short-term trader, you might want to wait for a pullback. The volatility is high — the EWY has a beta of about 1.2 against the S&P 500. Luna: So it's a high-beta bet on AI. And with the S&P hitting records today, maybe the momentum carries. Lucas: It could. But remember, the rest of the EM world is mixed. Brazil's EWZ is down over 2% this week. India's INDA is down. China's FXI is down. Korea is the outlier. That makes it a potential crowded trade. Luna: Crowded trades can unwind fast. But for now, the data supports the story. And the story is compelling. Lucas: It is. And I think that's the key takeaway: Korea's outperformance is not random. It's grounded in real demand, real earnings, and real competitive advantage. But it's not without risks. Luna: And maybe that's the lesson for EM investing in 2026 — you can't just buy the basket. You have to look at the individual stories. Lucas: Exactly. The days of a rising tide lifting all EM boats are over. Now it's about picking the right countries, and within them, the right sectors. Korea's tech story is one of the strongest right now. Luna: Well, we'll keep watching. Thanks, Lucas. Lucas: Thanks, Luna. And if you want to support the show, you know where to find us: buy me a coffee dot com slash fexingo. We'll be back tomorrow with another episode.