Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Taiwan's Market Is Beating Everything in Emerging Markets
Transcript
- Lucas: So we've been watching this week's numbers come in, and there's one market that is absolutely not getting the attention it deserves. Taiwan. Luna: Right, the EWT is up over eight percent in five days. That's not a blip. Lucas: Exactly. And while the broader emerging market gauges like EEM and VWO are up around three percent, Taiwan is running more than double that. It's the kind of divergence that makes you ask, what's actually driving this? Luna: My first guess is that it's the chip story. AI hardware demand is still the tailwind that lifts all boats, right? Lucas: That's part of it, and it's a big part. But if it were just AI, you'd see Korea up there too. The EWY is up nearly five percent, which is solid, but Taiwan is clearly the standout. So there's something else going on. Luna: So what is it? Because I keep hearing about the Japanese yen and the carry trade, but how does that connect to Taipei? Lucas: That's the thread. When the yen strengthened suddenly last week, it triggered an unwind of the carry trade — investors who had borrowed yen cheaply and put that money into higher-yielding assets around the world. As that trade reverses, money flows back out of some markets. But Taiwan is actually a beneficiary, because a lot of that capital is finding its way into strong tech exporters. Luna: So Taiwan is seen as a safe-ish place to park that money, relatively speaking. Lucas: Exactly. And look at the currency. The Taiwan dollar has held up remarkably well. While the trade-weighted dollar index is still elevated around 119.7, the Taiwan dollar hasn't weakened much at all. In fact, it's been one of the strongest EM currencies this year. Luna: That's interesting because a strong currency usually hurts exporters. But for Taiwan, maybe it's a signal of confidence. Lucas: Right. And it's not just the currency. Taiwan's trade surplus is running at record levels. The country is exporting everything from advanced chips to servers, and that surplus is bringing in dollars that support the currency and the equity market. Luna: So the fundamentals are genuinely strong. But is this eight percent move in five days justified, or is it just momentum chasing? Lucas: That's the million-dollar question. Let's unpack it. On the one hand, valuations were not stretched heading into this week. The forward price to earnings ratio for Taiwan was actually below its five-year average. So you had a market that was reasonably priced with strong earnings growth ahead. Luna: And that's a recipe for a rally when you get a catalyst. Lucas: Exactly. And the catalyst came from multiple directions. You had the carry trade unwind pushing flows into quality tech. You had the Bank of Japan's cautious tone, which kept the yen from rallying too far, and that gave Asia some breathing room. And you had, importantly, the AI demand story that just keeps getting more real. Luna: But isn't there a risk that the AI trade is getting crowded? I mean, we've seen this before. Lucas: There's always that risk. But the difference is that Taiwan's companies are actually delivering earnings. The semiconductor supply chain is running at high utilization rates, and the leading foundry just raised its capital expenditure guidance. That's not a story, that's real cash flow. Luna: So it's not all hype. But what about the concentration risk? Taiwan is heavily weighted towards a few big names, right? Lucas: You're right about that. The top couple of companies in the EWT make up a huge chunk of the index. So when they move, the whole market moves. It's a double-edged sword. It cuts both ways. Luna: So for an investor, is it better to buy the ETF or try to pick individual stocks? Lucas: For most people, the ETF is the way to go. It gives you exposure without the single-stock risk. And you get the currency play too, because the ETF is unhedged. If the Taiwan dollar keeps strengthening, that adds to your return. Luna: That's a good point. But I'm also thinking about the bigger picture. This divergence between Taiwan and, say, Brazil or Mexico — what does that tell us about where global investors are putting their money? Lucas: It tells us that the old 'emerging markets' label is less useful than it used to be. You have to look at each country's fundamentals. Taiwan is benefiting from being a key node in the AI supply chain. Meanwhile, Brazil is still tied to commodity prices, and Mexico is dealing with its own political and trade issues. Luna: So we're seeing a decoupling within EM. That's a theme we've touched on before, but it's becoming more pronounced. Lucas: Definitely. And the numbers this week are a stark illustration. While Taiwan is up over eight percent, Brazil and Mexico are actually down slightly. That's not just a one-week fluke; it's a structural trend. Luna: So should investors be overweight Taiwan right now? Or is it too late after this run? Lucas: That's the million-dollar question. Valuations are still reasonable, and the earnings momentum is strong. But you're also paying up for that quality. I'd say it's not too late, but you have to be prepared for volatility. This isn't a one-way street. Luna: And you have to think about the geopolitical risk. Taiwan is always a wildcard. Lucas: Absolutely. That's the elephant in the room. But interestingly, the market seems to be pricing that risk lower, not higher. The volatility index for Taiwan is actually below its historical average. So investors are comfortable, at least for now. Luna: So the market is saying 'we're okay with the risk for now, because the rewards are too good to ignore.' Lucas: Exactly. And if you're someone who's been listening to us for a while, you know that we like to look at these divergences because they often signal where the smart money is going. And right now, it's going to Taiwan. Luna: Speaking of smart money, if someone's found value in what we do here on the podcast, there's a simple way to support us. It's buy me a coffee dot com slash fexingo. Lucas: Yeah, and that's not a big ask. If today's conversation was worth the price of a coffee to you, that link makes it easy. We keep the show ad-free because of that kind of support. Luna: And we appreciate it. But back to Taiwan — what should our listeners watch for in the coming weeks to see if this rally has legs? Lucas: The key number to watch is the next round of monthly export data. If Taiwan's exports continue to grow at the pace we've seen, that will justify the rally. If they start to decelerate, then the market could give back some gains. Luna: And also keep an eye on the Fed. If the Fed cuts rates, that's usually good for emerging markets as the dollar weakens. Lucas: Right, but it's not that simple. If the Fed cuts because the economy is slowing, that could hurt global demand and hit Taiwan's exports. So it's a double-edged sword. Luna: So it's not just about the Fed, it's about why the Fed is cutting. Lucas: Exactly. And that's the nuance that gets lost in the headlines. But for now, Taiwan is enjoying a sweet spot: strong fundamentals, a supportive currency, and a global narrative that favors tech. Luna: Let's see if it lasts. But it's a fascinating case study in how a single country can stand out in a complex environment. Lucas: Absolutely. And you know, we'll be watching the next few weeks to see if this is the start of a longer trend or just a short-term pop. Either way, it's a reminder that emerging markets are not a monolith. Luna: Well said. I think that's a good place to leave it for today.