Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Korean Stocks Are Crashing While EM Diverges
Transcript
- Lucas: So South Korea has been the standout emerging market this year — up until about last week. The EWY ETF, which tracks Korean stocks, is down nineteen percent in five days. That's not a correction, that's a rout. Luna: Nineteen percent in five days? That's worse than anything we've seen in China or Brazil this year. What happened? Lucas: It's a perfect storm. First, Korea is deeply exposed to global trade — exports are something like forty percent of GDP. And the two biggest headwinds right now are the Iran war and the slowdown in China. Korea sends a huge chunk of its semiconductors and displays to China, and Chinese demand is softening. Plus, the war is disrupting shipping routes and raising energy costs, which hits a manufacturing-heavy economy like Korea hard. Luna: And this is on top of the structural issues we talked about in episode thirty-three — the export machine was already stalling. So this is an acceleration of that trend? Lucas: Exactly. Back in April, Korea's exports were still growing year-over-year, but the composition was shifting. Memory chips were doing okay, but auto exports were flat. Now with the war, you've got higher bunker fuel costs for shipping, longer transit times, and some buyers are just pausing orders. The preliminary May trade data was weak, and the market is pricing in a rough second half. Luna: Meanwhile, the EWZ — Brazil's ETF — is only down four point seven percent in the same period. India barely moved. So the divergence within emerging markets is stark. Is Korea the canary in the coal mine, or is this a country-specific story? Lucas: I think it's both. Korea is a bellwether for global trade because it's so integrated. If the world economy is slowing, Korea feels it first. But there's also a Korea-specific factor: the won. The trade-weighted dollar index has slipped a bit — it's at one hundred eighteen point nine, down from one nineteen — but the won has weakened more than most EM currencies this year. That's usually good for exporters, but when the problem is demand, a weaker currency doesn't help. It just makes imports more expensive, and Korea imports most of its energy. Luna: Right, because they have to pay more for oil and gas, and that squeezes margins. So the usual export boost from a weak currency is nullified by the energy cost spike. That's a tough spot. Lucas: And look at the other EM ETFs: the EEM, which is the broad emerging market ETF, is down seven point eight percent in five days. VWO is down four percent. Korea is dragging the whole basket down. But if you strip out Korea, the rest of EM is actually holding up reasonably well. India's INDA is down only one point four percent. China's FXI is down one point seven. So the market is making a distinction. Luna: That's the divergence we keep coming back to this year. It's not 'EM is selling off', it's 'some EM is selling off a lot, some is not.' And the question for investors is whether this Korean selloff is overdone. Lucas: And that's exactly what we're going to dig into. We look at the numbers, we look at the sectors — semiconductors in particular — and we try to figure out if this is a buying opportunity or a warning that more shoes are about to drop. Luna: Let's start with semiconductors, because that's Korea's biggest export category. Samsung and SK Hynix are the two giants. How exposed are they to the current environment? Lucas: Enormously. Semiconductors make up about twenty percent of Korea's total exports. And the memory chip market is cyclical — we're coming off a boom in 2024 and early 2025, but now there are signs of oversupply. Demand from data centers is still strong, but consumer electronics — phones, PCs — are soft. And China, which is a big buyer of memory chips for its own manufacturing, is slowing. Plus, the Iran war is creating uncertainty around shipping routes through the Strait of Hormuz, which affects logistics even for chips that don't go through there, because insurance costs rise across the board. Luna: So it's a demand shock combined with a logistics cost shock. That's a double hit. And the stock prices are reflecting that. Samsung is down a lot, SK Hynix even more. Lucas: Samsung is actually down about fifteen percent from its May high. SK Hynix is down closer to twenty-five percent. But here's the thing: these companies are still incredibly profitable. Their price to earnings ratios have compressed a lot. Samsung is trading around twelve times forward earnings, SK Hynix around eight. That's cheap by historical standards. Luna: Cheap, but cheap for a reason. The question is whether earnings will fall further. If the cycle turns down more sharply, those earnings estimates will get cut, and the P/E will expand even if the stock falls. So value trap risk is real. Lucas: Exactly. And that's why you can't just look at the P/E in isolation. You have to look at the earnings trajectory. Analysts are starting to cut estimates for the second half of 2026. Some are already predicting a twenty to thirty percent drop in memory chip prices by year-end. If that happens, earnings will fall more than stock prices have, and the stocks could go lower. Luna: So what about other sectors? Korea isn't just chips. It's autos, shipbuilding, steel, petrochemicals. Are those also getting hit? Lucas: Yes, but not equally. Autos are actually holding up better because Hyundai and Kia have diversified production — they make a lot of cars in the US and Europe, so they're less exposed to the China slowdown. But shipbuilding has been hit because the war is raising steel costs and making buyers nervous about ordering new ships. Petrochemicals are suffering from high oil prices. So it's broad-based, but semiconductors are the biggest weight. Luna: And then there's the geopolitical angle. Korea is a US ally, but it's also dependent on trade with China. The Iran war is putting pressure on the US to enforce sanctions, and Korea has to navigate that. Plus, there's always the North Korea risk, though that's been quiet lately. Lucas: Right. The geopolitical risk premium has actually come down a bit because North Korea hasn't been in the headlines. But the us china trade tensions are still there, and Korea is caught in the middle. If the US pressures Korea to limit technology exports to China, that could hurt Samsung and SK Hynix even more. Luna: Putting all this together, it feels like the market is pricing in a pretty severe downturn. But is it possible that the selloff is overdone? I mean, nineteen percent in five days is a massive move. Sometimes that creates opportunities. Lucas: It can. But you need to have a view on whether the earnings cycle will bottom soon. If you think the global economy will avoid a recession and chip demand recovers in 2027, then buying at these levels could look smart. But if you think we're heading into a deeper slowdown, then this is just the first leg down. Luna: And what do you think? Are you leaning one way or the other? Lucas: I think it's too early to call a bottom. The war is still ongoing, the China recovery is uncertain, and the Fed hasn't signaled any rate cuts. We need to see more data — the next few weeks of trade numbers and earnings pre-announcements will be crucial. But I will say, the valuations are starting to look interesting. If you're a long-term investor with a five-year horizon, Korea has historically been a good buy during panics. You just have to stomach the volatility. Luna: And that's the hard part. Because when the market is down nineteen percent in a week, it feels like it could go down another nineteen. The emotions are powerful. Lucas: And that's exactly the kind of discussion where we're glad this show doesn't run ads. You know, we deliberately keep the podcast ad-free because we want to have these conversations without any pressure to drive clicks or sell products. If you find value in that approach and want to support it, the simplest way is at buy me a coffee dot com slash fexingo. No pressure, just an option for those who want to help keep it ad-free. Luna: Yeah, it's a small gesture that goes a long way in keeping the show independent and focused on what matters — the analysis, not the ad reads. So if you're inclined, that link is buy me a coffee dot com slash fexingo. And now back to Korea — because there's more to unpack. Lucas: So let's talk about what other investors are doing. Are we seeing any signs of forced selling, or is this mostly discretionary? Luna: There's probably some of both. When an ETF drops nineteen percent in a week, some leveraged players get margin calls. And some active managers are likely reducing EM exposure to manage risk. But I think the bigger factor is that Korea had become a crowded trade — everyone loved it for the semiconductor cycle and the 'friend-shoring' narrative. That trade is now unwinding. Lucas: Right. Korea was one of the most popular EM trades in 2025 and early 2026. The KOSPI hit all-time highs in April. So the positioning was very long. When the war started and the trade data turned, everyone tried to exit at once. That's a classic overcrowded trade unwind. Luna: And we saw similar dynamics in other crowded trades — like China tech in 2021. So the pattern is familiar. The question is whether the fundamental thesis is broken or just delayed. Lucas: I think the long-term thesis for Korea as a beneficiary of supply chain diversification is still intact. Companies are still moving some production out of China, and Korea is a logical alternative. But the timing is uncertain. The war has introduced a lot of short-term noise. Luna: And that's the challenge for investors — distinguishing between noise and signal. The noise is the daily headlines about the war and trade. The signal is the underlying demand for semiconductors, which is still growing secularly from AI and data centers. Lucas: Exactly. The AI demand for high-bandwidth memory from SK Hynix and Samsung is real and growing. That's a multi-year trend. The question is whether the current cyclical downturn in consumer chips will overwhelm that secular growth in the near term. My sense is that by 2027, the ai driven demand will dominate, and the current dip will look like a buying opportunity. But in the next six months, it could get worse before it gets better. Luna: So for listeners who are thinking about buying Korean stocks now, what's your advice? Lucas: I'd say don't try to catch a falling knife. Wait for some stabilization — maybe a few days without new lows, or a positive catalyst like a ceasefire in the Iran war or better than expected trade data. And if you do buy, dollar-cost average. Buy a little now, a little more if it falls further. Don't go all in at once. Luna: And keep an eye on the won. If the won weakens a lot more, that could be a sign of capital flight, which would be very bearish. But if it stabilizes, that's a good sign. Lucas: Good point. The won has weakened to about one thousand four hundred per dollar, which is near its weakest level in years. If it breaks through that, it could trigger more outflows. But so far, it's holding. Luna: So to sum up: Korea is getting hammered because of its export exposure to a slowing global economy, the Iran war, and a weakening China. But valuations are cheap, and the long-term AI and supply chain story is still there. It's a high-risk, high-reward play right now. Lucas: And it's a good reminder that in emerging markets, you can't just buy the basket. Divergence is the name of the game in 2026. You have to be selective. Korea might be the biggest loser this week, but that doesn't mean it's the worst investment for the next five years. Sometimes the biggest losers become the biggest winners — if you have the patience and the stomach. Luna: And that's the kind of perspective we try to bring every week. We'll keep watching the data and bring you updates as the story evolves. Lucas: Thanks for listening. We'll be back next week with another deep dive into the markets that matter.