Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Market ETFs Are Pricing a Diverging Recovery
Transcript
- Lucas: So you look at the emerging market ETF space this week, and it's telling two completely different stories. The broadest funds — EEM and VWO — are down almost 2% in the last five days. But China-focused funds like FXI and KWEB are up more than 2%. That's a nearly 4-percentage-point gap. Luna: That's a pretty big divergence for two asset classes that usually move together. What's driving it? Lucas: Part of it is the dollar — it's still strong, the trade-weighted index is at 120.5, which is historically high. That's a headwind for most emerging markets because it makes their dollar-denominated debt more expensive and hurts their exports. But China is almost in its own universe right now. Luna: Right, because China's stimulus is the main story there. But also the yuan weakened a bit to 6.78 per dollar — that helps exporters. Lucas: Exactly. And look, if walking through the economy with us has made something click — like understanding these divergences — honestly, if today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep this ad-free and focused on what matters. And it really helps. Lucas: So back to the divergence. China's export machine has been under pressure — you can see it in the trade data. The US trade deficit widened to $77.6 billion in May, and imports are still climbing faster than exports. But China-specific ETFs are pricing in a domestic recovery, not an export one. Luna: And the stimulus is real — they've been cutting rates and propping up housing. But how much of that is already in the price? Lucas: That's the billion-dollar question. FXI is up 2.1% this week, but it's still down year-to-date if you look at the broader picture. The market is saying 'we believe the stimulus will work' but it's not fully convinced. Meanwhile, other emerging markets are dealing with a different set of problems. Luna: Like the strong dollar and higher interest rates. For countries with big current account deficits, it's a double whammy. Lucas: Yes. The US current account deficit widened to $226.8 billion in the first quarter — that's a lot of dollars flowing out, but it also means the dollar stays strong because global investors want US assets. That's bad for emerging markets that borrowed in dollars. Luna: So which markets are actually benefiting from this? I saw Mexico's EWW was up 1.3% this week. Lucas: Mexico is a fascinating outlier. It's up because of nearshoring — US companies are shifting supply chains away from China and into Mexico. That trend is real, and it's showing up in the ETF. EWW is up 1.3% this week even as broader emerging markets are down. Luna: So the old idea of 'emerging markets' as a single asset class is basically broken. You have to look at each country's specific story. Lucas: Completely. And the data backs that up. South Korea's EWY is down 3.3% this week — that's a big drop. They're an export powerhouse, but they're getting squeezed by both weak global demand and competition from China in areas like semiconductors and shipbuilding. Luna: Meanwhile, Taiwan's EWT is down even more — 4.5%. That's the worst performer among the ones we track. Lucas: Taiwan is a special case because it's so tied to the semiconductor cycle. And there's geopolitical risk baked in. But even setting that aside, the export numbers globally are softening. The US trade deficit widened, which suggests demand is still there, but imports are growing faster than exports — that's a sign of weak domestic production. Luna: So for an investor trying to navigate this, what's the takeaway? Buy China on stimulus, buy Mexico on nearshoring, avoid Korea and Taiwan? Lucas: I think it's more nuanced than that. China's stimulus is real, but it's not a sure thing — the property sector is still a mess. Mexico's nearshoring story is durable, but it's already priced in to some extent. And Korea and Taiwan might be oversold if the semiconductor cycle turns. The key is to stop thinking of emerging markets as one trade. Luna: Yeah, it's almost like you need a country-by-country thesis. The days of just buying EEM and hoping for the best are over. Lucas: Exactly. And that's actually a healthier way to think about these markets. They're not a monolith. They're individual economies with their own cycles, their own policy responses, and their own vulnerabilities. The ETF divergence this week is just a snapshot of that reality. Luna: It's interesting — the market is effectively saying China is decoupling from the rest of the emerging world. At least for now. Lucas: Right. But decoupling can go both ways. If China's stimulus works and their economy picks up, that could boost commodity prices and help other emerging markets like Brazil or Chile. But that hasn't happened yet. Brazil's EWZ is basically flat this week, down 0.5%. So the spillover isn't there. Luna: So we're in a wait and see period. The dollar is still strong, China is still trying to find its footing, and everyone else is caught in between. Lucas: That's the best way to put it. And the key number to watch in the coming weeks is the yuan. If it weakens further, that's a tailwind for China's exports but a headwind for other emerging markets that compete with China. If it stabilizes, that might signal the stimulus is working. Luna: And the dollar index — if it starts to fall, that would be a huge relief for emerging market debt. But so far it's sticky. Lucas: Sticky is the right word. It dipped a little — from 120.75 to 120.5 — but that's basically noise. We need to see a sustained move below 120 to really change the narrative. Until then, the divergence we're seeing now is likely to continue. Luna: So the playbook is: pay attention to the dollar, watch China's stimulus, and don't treat all emerging markets the same. Lucas: Exactly. And that's a much more interesting conversation than just saying 'emerging markets are down.' The details matter.