Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / The Trade Deficit Spike Is Splitting Emerging Markets
Transcript
- Lucas: So the US trade deficit just did something that caught my attention. In May it hit $77.6 billion, up from $54.6 billion in April. That's a 42 percent jump in one month. Luna: That's a huge swing. What's driving it — imports or exports? Lucas: Both moved, but imports jumped a lot more. Exports are up about four and a half percent year over year, but imports are up nearly five percent. And given the geopolitical backdrop — the Iran strikes, the oil jitters — a chunk of that is probably energy and maybe some tariff front-running. Luna: So where does that leave the emerging markets that supply the US? Lucas: That's the interesting part. The deficit tells us where demand is flowing. Mexico has been America's top trade partner for a while, and they're still seeing strong export numbers. Vietnam and India are also picking up share. These are the supply chain shifters. Luna: But then you look at the market data this week — it's brutal for some. Korea's EWY ETF is down over 17 percent in five days. Taiwan's EWT is down over 10 percent. Lucas: Right. And that's the split. The countries that rely on tech exports — semiconductors, electronics — are getting crushed. Korea and Taiwan are essentially the hardware side of the AI trade, and that trade is deflating. Meanwhile, Chinese consumer stocks like JD and Pinduoduo are up 7 and 6 percent respectively this week. Luna: So the deficit data is basically confirming a rotation: away from cyclical tech hardware and toward domestic consumption in China, plus nearshoring beneficiaries. Lucas: Exactly. The market is pricing in that the US demand is for goods that Mexico, Vietnam, and India make, not for the chips that Korea and Taiwan produce. Or at least, the chip demand is slowing relative to expectations. Luna: And we should mention the dollar. The trade-weighted dollar is down a bit from 120.9 to 120.7, which helps emerging markets that import dollar-denominated commodities. But it's a small move. Lucas: Yeah, the dollar is still very strong historically. But the Fed left rates unchanged this week, and Chairman Warsh is getting some pushback. Markets are starting to question whether the Fed will cut soon. That uncertainty is keeping EM currencies under pressure. Luna: On that note — quick honest thing. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. If walking through the economy with us has made something click, that's one way to keep it ad-free. Lucas: Yeah, we don't run ads, and we want to keep it that way. So if you find value in the show, that's the place. Now back to the trade data — one more layer is the oil angle. Luna: Because the Iran strikes? That's pushed Shell's profits up — they more than doubled last quarter. Lucas: Exactly. Higher oil prices help oil-exporting emerging markets like Saudi Arabia, the UAE, and even Brazil, though Brazil's EWZ ETF is still down nearly 2 percent this week. But for oil importers like India, it's a headwind. India imports about 80 percent of its crude, and a sustained oil spike could widen their current account deficit. Luna: So you've got this three-way divergence: nearshoring winners, tech hardware losers, and oil-dependent countries caught in the middle. Lucas: Right. And it's happening inside the same asset class. The EEM emerging market ETF is down 5.5 percent this week, but that masks huge variation. China is up, Korea is way down. If you're just buying a broad EM ETF, you're missing this story. Luna: So what should investors watch next? The trade deficit is a lagging indicator — May data just came out. But the market is already moving. Lucas: Watch the dollar and the Fed's next move. If the dollar weakens meaningfully, it could lift all EM boats temporarily. But the structural winner is still the supply chain reconfiguration. Mexico, Vietnam, India — those trends are durable. Korea and Taiwan need a catalyst — maybe a bottom in chip demand or a new product cycle. But right now, the trade data says the US is buying different things than it was a year ago. Luna: And Chinese stocks? That rally — is it real or a bear market bounce? Lucas: That's the $30 billion question. FXI is up nearly 5 percent this week, but the Chinese economy is still struggling with property and deflation. The rally seems more about valuation and short covering than a fundamental turn. But if consumer stocks like JD and PDD are leading, maybe it's a signal that the domestic consumer is stabilizing. Luna: Either way, the next few weeks could be volatile. The Iran situation, the Fed, and earnings season will all hit at once. Lucas: Yeah, and we'll be watching. For now, the big takeaway: the US trade deficit isn't just a number — it's a map of where the money is flowing in emerging markets.