Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Emerging Markets Are Splitting Into AI and Commodity Plays
Transcript
- Lucas: So, Korea is up over ten percent in the last five days, while China's big internet names are down six to thirteen percent. That's a striking divergence, and it's not just a blip. Luna: It feels like the AI trade is really separating the winners from the losers in emerging markets right now. Korea gets the hardware demand, China gets the regulatory overhang. Lucas: Exactly. And the numbers back that up. The iShares MSCI South Korea ETF, ticker e w y, is up over ten percent in a week. Meanwhile, the KWEB, the China internet ETF, is down over seven percent. That's a massive gap. Luna: And it's not just the ETFs. Alibaba, JD, PDD — all down sharply. JD alone fell thirteen percent in five days. That's brutal. Lucas: It is, and it's worth asking why. Part of it is that AI hardware demand is booming, and Korea is a key supplier. But there's also a currency angle here. The yen weakened to 157.5 per dollar, and that's putting pressure on China to keep the yuan stable, which they've done at around 6.75. Luna: So a weak yen makes Korean exports more competitive, but a stable yuan might be hurting China's export edge? Lucas: Right. Look, the trade deficit is still widening — imports are outpacing exports. The June goods and services trade deficit was seventy-three point two billion dollars, down from seventy-seven point six billion in May. But the current account deficit is actually worse, at two hundred twenty-six point eight billion as of January. Luna: That's a lot of dollars flowing out. And it's not just about the US — it's about how that affects emerging market currencies and competitiveness. Lucas: Exactly. And when you have a weak yen, it creates a race to the bottom in Asia. China doesn't want to let the yuan appreciate too much, but they also can't devalue aggressively without triggering capital outflows. So they're stuck with a stable currency while Korea benefits from a weaker one. Luna: So Korea is winning on both fronts: AI demand and currency. That explains the ten percent jump. Lucas: And it's not just Korea. Taiwan is up nearly five percent, likely on the same AI hardware wave. But China is the outlier — down. The FXI, the China large-cap ETF, is down four point four percent, and the MCHI is down four percent. Luna: It's like the market is pricing in a fundamental shift. AI hardware exporters are beating AI adopters in emerging markets. We talked about that in an earlier episode, but the magnitude here is striking. Lucas: Yeah, and it's not just about AI. There's also a regulatory element. The headlines about OpenAI's talent exodus are a reminder that the AI landscape is volatile, but for Korea, they're just supplying the picks and shovels. Luna: Speaking of the show — you know, we've been doing this for over a hundred fifty episodes now. And it's only possible because a small group of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's literally what funds us making this many of these. Lucas: It's true. No ads, no corporate sponsorship. Just listener support. And it keeps us independent, which matters when we're talking about stuff like this. Luna: So if you've gotten value out of these episodes, and you can spare a couple bucks a month, it goes a long way. That's buy me a coffee dot com slash fexingo. But back to the markets — Lucas: So, where does this leave emerging markets as a whole? The EEM is up two point two percent over five days, but the VWO is down point four. That's a huge divergence within the same asset class. Luna: So it's not just country-specific — even the broad indexes are telling different stories. What's driving the VWO down? Lucas: Well, the VWO includes China, which is a big weight. And China is dragging. But also, Brazil is down three point seven percent, and Mexico is down two point five. So it's not just China — it's a broader EM ex-Asia problem. Luna: So the AI trade is really concentrated in Korea and Taiwan, while the rest of EM is suffering. That's a pretty stark divide. Lucas: It's exactly the kind of thing we've been talking about for months — the decoupling into growth and yield. But now it's sharper. The growth side is AI hardware, and the yield side is everything else. Luna: And where does India fit? INDA is down point seven percent, so it's not participating in the rally, but it's not crashing either. Lucas: India is in a weird spot. It's not a direct AI hardware exporter, but it has a strong domestic growth story. So it's kind of in between. But it's not seeing the same selling pressure as China or Brazil. Luna: So what should investors take away from this? Is it just 'buy Korea, sell China'? Lucas: I think it's more nuanced. The AI hardware trade is real, but it's also getting crowded. And the regulatory risks in China are real, but that also means valuations are getting cheap. There's a case for selective buying. Luna: But you'd want to be careful, right? Because if the AI trade reverses, Korea could fall just as fast. Lucas: Absolutely. And we saw that with the chip rout earlier this year. So it's about timing and diversification, not just chasing the hottest market. Luna: So maybe the lesson is to look at the currency and the trade flows, not just the hype. Lucas: Exactly. The yen at 157.5 is a big deal. It's been weakening for a while, and that's reshaping competitiveness across Asia. And the yuan staying at 6.75 is a sign that China is trying to manage things carefully. Luna: But can they hold it if the dollar keeps strengthening? The trade-weighted dollar index is down a bit, at 119.1, but it's still high. Lucas: That's the key question. If the dollar stays strong, emerging markets with debt will feel the pinch. But if it starts to weaken, we could see a broader EM rally. For now, it's a stock picker's market. Luna: So bottom line: Korea and Taiwan are the AI darlings, China is the value play with risks, and the rest of EM is stuck in the middle. Lucas: That's a fair summary. And the numbers we're seeing this week really crystallize that. Korea up ten, China down four to seven, Brazil down three. It's a clear signal. Luna: And it's not going to change overnight. So investors need to be nimble. Lucas: Right. And that's what we're here to help with. Thanks for listening, and we'll catch you next time.