Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why AI Hardware Exporters Are Losing to AI Adopters in Emerging Markets
Transcript
- Lucas: South Korea's EWY ETF is down nearly fifteen percent in the past five days as of today. That's a brutal week by any measure. But compare that to China's FXI, which is up over five percent in the same period. Same global backdrop, same week, completely different stories. Luna: That's a massive divergence. And it's not just Korea—Taiwan's EWT is down over nine percent. But India's INDA is up over three percent. What's driving this split? Lucas: The big story is the AI trade. But it's not a simple 'AI is good' or 'AI is bad' story. There's a clear bifurcation between countries that supply the hardware for AI—like Korea and Taiwan—and countries that are adopting AI to drive revenue growth in services and e-commerce, like China and India. Luna: So you're saying the chip makers are getting hammered while the companies that use AI are getting rewarded? Lucas: Exactly. The chip cycle is turning. We've seen massive inventory builds, and now demand from hyperscalers is showing signs of softening. Korea's semiconductor exports have been a key driver, and that's reversing. Meanwhile, Chinese internet companies like JD—up over seven percent this week—and Pinduoduo, up nearly seven percent, are showing strong earnings growth from integrating AI into their platforms. Luna: And the Fed's decision today probably didn't help the hardware side. The Fed held rates steady, but three members voted to hike, and the statement was hawkish. That hit growth stocks, especially chip names. Lucas: Right. The Dow dropped nine hundred points today on that news. And the trade-weighted dollar index is still elevated at 120.7, which is a headwind for countries that export dollar-denominated goods. Korea and Taiwan feel that more directly. Luna: Whereas China and India have larger domestic markets and are more insulated from a strong dollar. Plus, the US trade deficit widened to a record seventy-seven point six billion in May. That's actually a sign that US demand is still strong, which helps exporters like China. Lucas: But it's a selective benefit. The US is importing more goods from China even as it tries to decouple. That's why the Chinese internet stocks are rallying—they benefit from a strong consumer economy. Meanwhile, semiconductor demand is more cyclical and tied to capital expenditure cycles. Luna: So is this divergence structural? Are we seeing a long-term shift where AI adopters outperform AI enablers? Lucas: It's possible. The market is essentially revaluing the AI value chain. The hardware buildout was the first phase, but now the returns are going to the companies that can deploy AI at scale. Look at India's IT services firms—they're using AI to improve margins. That's reflected in INDA's three percent gain this week. Luna: But China's rally is partly driven by stimulus hopes too, right? The government has been rolling out measures to boost consumption. That's a domestic factor separate from AI. Lucas: Absolutely. The Chinese internet rally is a combination of AI adoption and policy support. JD and Pinduoduo are direct beneficiaries of stimulus. But Korea doesn't have that cushion. The KOSPI is heavily weighted toward Samsung and SK Hynix, which are both deep in the chip downturn. Luna: And the geopolitical risk hasn't helped. With Trump threatening to 'beat Iran' and the Fed divided, there's a lot of uncertainty. The VIX is probably spiking. Lucas: This is exactly the kind of environment where emerging market dispersion gets extreme. For investors, the old 'buy the EM basket' approach is dangerous. You need to be selective. The countries that are pivoting to AI services and have strong domestic demand are doing well; the ones tied to hardware and exports are struggling. Luna: Before we go further, I want to mention something about this podcast. We put a lot of effort into making these episodes ad-free because we think that's the right way to explain complex economics. If walking through the economy with us has made something click for you, and you'd like to support that principle, the link is buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that keeps us independent and focused on the substance. No ads, no sponsors to please. Just the analysis. Luna: Exactly. Now back to the divergence—where do you see this heading over the next quarter? Lucas: I think the hardware rout may have more room to run. The Fed's hawkish stance means tighter financial conditions, which is bad for capital-intensive chip fabs. Meanwhile, AI adoption in services should continue to lift companies in China and India. But a lot depends on whether the US economy actually slows down or not. If the trade deficit keeps widening, that means US demand is holding up, which is good for exporters. Luna: But if the Fed is forced to hike later this year, that could reverse the dollar's decline and hit EM again across the board. Lucas: Right. There are three dissents at the Fed—that's a clear signal that more hikes are possible. The dollar index is still near 121. Any strengthening from here would be a headwind for all EM, especially those with dollar-denominated debt. But the divergence I'm tracking is about relative performance, not absolute. China and India may fall less if the dollar strengthens, because of their domestic demand. Luna: So the key takeaway for listeners is: don't treat emerging markets as a monolith. The AI trade is causing a tectonic shift. Lucas: And that shift is being accelerated by the Fed's policy stance and the trade dynamics. For now, investors are paying a premium for countries that can generate ai driven revenue growth, and punishing those tied to hardware cycles. It's a new world order in EM.