Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Market Stocks Are Decoupling from China
Transcript
- Lucas: Alright Luna, I want to start with a single data point that caught my eye this week. The iShares MSCI South Korea ETF, ticker e w y, is up eleven percent over the past five trading days. That is not a rounding error. Luna: Eleven percent in five days? That's dramatic. Meanwhile, the iShares China Large-Cap ETF, F-X-I, is basically flat, and the KraneShares CSI China Internet ETF, K-W-E-B, is down almost five percent. Lucas: Exactly. And it's not just Korea. Taiwan's E-W-T is up seven point two percent over the same period. But then you look at Brazil's e w z, down three percent. The old assumption that emerging markets all move together because they're all 'risky' and all sensitive to the dollar is breaking down. Luna: So you're saying we're seeing a decoupling within emerging markets themselves? Not just EM versus developed markets? Lucas: That's exactly what I'm saying. For years, the shorthand was: if China sneezes, emerging markets catch a cold. And in many ways that was true — China is the largest EM economy, it's a huge trading partner for its neighbors, and it drives commodity demand. But the data from the last couple of weeks suggests a more granular story. Luna: Let's put some specifics on that. Which stocks are driving the Korea surge? Lucas: It's led by semiconductor and memory chip makers — Samsung Electronics and SK Hynix. They've benefited from the AI buildout and supply chain shifts away from China. Taiwan's surge is similar, with TSMC leading. Meanwhile, Chinese internet names like Alibaba, JD.com, and Baidu are all down three to five percent in the same five-day window. Luna: Right, and we've got the yuan weakening further — it's at six point seven six per dollar as of June twelfth. That's a headwind for Chinese stocks, especially tech, because it raises import costs and spooks foreign investors. Lucas: And the dollar index itself has slid a bit — it's at one hundred nineteen point five, down from one hundred twenty point one two a week earlier. So it's not a simple 'strong dollar crushes all EM' story either. The traditional EM playbook assumed that when the dollar weakens, all EM assets rally. But right now, Korean and Taiwanese stocks are rallying on their own fundamentals, while Chinese stocks are struggling with domestic growth concerns and geopolitical overhang. Luna: The Strait of Hormuz headlines this weekend — Iran reportedly closing it again — that's a wildcard for oil-importing EMs like Korea and Taiwan. But it seems the market is looking past it for now. Lucas: Because the market is focused on the structural story. Korea and Taiwan are in the sweet spot of the AI and semiconductor capex cycle. China's internet sector, by contrast, is facing regulatory fatigue and a consumer that's still cautious. It's a reminder that 'emerging markets' is a label of convenience, not an asset class that behaves uniformly. Luna: You know, this is exactly the kind of thing that makes listening to this show worthwhile — understanding the nuance rather than just the headline. And it's also a good moment to mention that the reason we can keep doing deep dives like this, ad-free, is because of a handful of listeners who chip in monthly through Buy Me a Coffee dot com slash fexingo. Lucas: Yeah, absolutely. It's a small group, but it makes a big difference. If you've been following the show and getting something out of it, that's how you can help keep it going. No pressure, just the honest truth. Luna: And now back to the decoupling thesis. Lucas, you mentioned EM bonds earlier — how do they fit in? Lucas: Interestingly, EM bonds have been acting as a relative safe haven this year. When the Strait of Hormuz news broke, we didn't see the kind of panic selling in EM debt that we would have seen five years ago. Partly because many EM central banks have been buying gold at record pace and building reserves, as we discussed in episode fifty. Also, yields on EM bonds are still attractive compared to developed markets. Luna: But isn't that just a function of higher risk premiums? If the Fed cuts rates later this year, dollar-based investors might rotate back into EM debt. Lucas: That's part of it. But I'd argue the decoupling is also happening in fixed income. Look at India: its ten-year bond yield is around seven percent, and the rupee has been relatively stable. That's attracting real money flows, not just hot money. Indonesia is similar. These are countries with credible fiscal policy and domestic demand stories. Luna: So for an equity investor, the takeaway might be: don't buy an EM ETF and assume you're diversified. You need to be more selective. Lucas: Right. A broad EM ETF like EEM or VWO is still heavily weighted toward China and the larger constituents. If you want to capture the korea taiwan ai story, you might need a specific country ETF or even individual stocks. Same with the Brazil commodity story, which right now is struggling. Luna: Brazil's e w z down three percent in five days — that's interesting because commodity prices have been mixed. Iron ore is down, oil is volatile with the Hormuz situation. Lucas: Exactly. Brazil is a different cycle altogether. It's more tied to Chinese demand for raw materials, and with China slowing, Brazil suffers. Whereas Korea and Taiwan are exporting finished goods and components that the world still wants, especially ai related. Luna: So the decoupling is real, but it's not a uniform shift — it's a fragmentation. Some EMs are doing well on their own merits, others are still tied to China's fate. Lucas: And some are tied to the dollar, or to commodity cycles, or to geopolitics. The Strait of Hormuz closure, if it persists, could be a major test for oil-importing EMs. But so far, the market is treating it as a temporary disruption. Luna: Let's zoom out. What does this mean for the next six to twelve months? Lucas: I think the key is to watch the yuan. If the yuan continues to weaken, Chinese stocks will remain under pressure, and that will drag on the broader EM indices. But the countries that have built domestic demand and supply chain links outside of China — like India, Korea, Taiwan, and parts of Southeast Asia — they can decouple further. Luna: India's been a standout, but we didn't see a huge move this week. INDA, the India ETF, is up but not dramatically. Lucas: India's story is more about steady compounding. It's not volatile like Korea or Taiwan. But over the past year, it's been one of the best performers among large EMs. The digital public infrastructure we talked about in episode forty-eight is real. Luna: So the takeaway for our listeners: don't assume EM is a monolith. Look under the hood. The decoupling may be the biggest EM theme of 2026. Lucas: And one final thought — the bond market is also signaling differentiation. EM bonds that are dollar-denominated are behaving differently from local-currency bonds. Investors are doing the work to understand which countries have credible policies. That's a healthy sign of maturity in the asset class. Luna: Alright, we'll keep watching the data. Thanks for joining us on this episode of The Emerging Markets Podcast with Fexingo. Lucas: If you want to support the show, head to Buy Me a Coffee dot com slash fexingo. We appreciate every bit of support.