Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How South Korea's Export Machine Is Stalling in 2026
Transcript
- Lucas: South Korea has been the poster child for the 'AI trade' in emerging markets this year. But this week, the EWY ETF — that's the iShares MSCI South Korea Capped ETF — is down seventeen and a half percent in five days. That is a staggering move. Luna: Seventeen and a half percent. And it's not just EWY. The KOSPI index has been getting hammered. What's driving the selloff? Lucas: The proximate cause is semiconductor stocks. Samsung and SK Hynix have been under heavy selling pressure. There's a headline from earlier this week — Samsung warned that memory chip demand is softening in the second half of the year. That's a big deal because semiconductors account for roughly twenty percent of Korea's total exports. Luna: Right, and SK Hynix is the dominant player in high-bandwidth memory for AI. If they're seeing a slowdown, that's not just a Korea story — that's a global AI infrastructure story. Lucas: Exactly. And the timing is brutal. On June 1st, the Korean trade ministry reported export numbers for May. Headline exports were up year-over-year, but the growth rate was the slowest in five months. Semiconductor exports actually dipped month-over-month. When you're priced for AI perfection, a deceleration hits hard. Luna: And there's a currency angle too, right? The won has been weakening against the dollar — it's around 1,392 won per dollar as of this week. That normally helps exporters, but the flip side is that Korea imports a ton of energy and raw materials, so a weak won raises input costs. Lucas: And it's not just the dollar-won pair. The yen is also weak, and Japan and Korea compete directly in chips, autos, shipbuilding. A weak yen makes Japanese exporters more competitive globally, which puts pressure on Korean companies. The yen is at 159.2 to the dollar as of yesterday. That's brutal for Korea. Luna: So Korea is getting squeezed from both sides — weakening demand for its key export product and a currency environment that hurts its competitiveness versus Japan. Lucas: And then there's China. Korea's largest trading partner. China's economy is still struggling to regain momentum, and exports to China in May were down. The data from the Korea Customs Service showed shipments to China fell four percent year-over-year in May. That's a big red flag. Luna: I remember from episode twenty-four, we talked about China tech stocks diverging. But this feels different — this is the real economy, not just stock market divergence. Lucas: It is. And the market is now pricing in that the ai driven demand boom for memory chips may have peaked or at least plateaued. There's a lot of inventory built up. And if the big hyperscalers — Microsoft, Amazon, Google — start to moderate their capex growth, that hits Hynix and Samsung directly. Luna: And yet, South Korea was the standout EM performer earlier this year. I think at one point EWY was up something like fifteen percent year-to-date before this selloff. Lucas: It was. Through April, Korea was the best-performing major emerging market. The narrative was 'Korea is the AI chip factory.' But now investors are asking: how much of that is already in the price? And if earnings peak in 2026, the forward price to earnings ratio for the KOSPI is still around eleven times. That's not obviously cheap if earnings are about to roll over. Luna: So what does this mean for the broader emerging market picture? We've seen EEM down seven percent in five days, VWO down three and a half. Is Korea dragging the whole asset class down? Lucas: Partially. Korea is about twelve percent of the MSCI Emerging Markets Index. So a seventeen percent drop in Korea shaves off about two percentage points from the index. But other markets are also weak — Brazil's EWZ is down four and a half percent, Thailand's EWT down seven percent. There's a general risk-off mood this week. Luna: The Nasdaq fell sharply too, as we saw in the headlines. And the jobs report came in hot, pushing rate cuts further out. That's a double whammy for EM — higher US rates for longer and a tech selloff. Lucas: Right. The ten-year Treasury yield is up again, and that typically leads to capital outflows from EM. But Korea's selloff has been more extreme because of the specific vulnerability: it's a high-beta play on both tech and global trade. When both of those wobble, Korea gets crushed. Luna: And there's a structural point too, isn't there? Korea's export machine is incredibly efficient, but it's also concentrated. Semiconductors, autos, ships, petrochemicals — that's basically the whole list. Lucas: Exactly. The top ten export products account for over sixty percent of total exports. And semiconductors alone are about one-fifth. So when the chip cycle turns, the whole economy feels it. The government is trying to diversify — they have a big push in nuclear energy exports, in defense, in K-culture — but those are still small relative to chips. Luna: And the geopolitical risk is always there. North Korea, China-Taiwan tensions, the us china tech war. Korea is caught in the middle. Lucas: It's a difficult position. The US wants Korea to limit chip exports to China, but China is still a huge customer. The CHIPS Act and export controls are forcing Samsung and Hynix to make hard choices about where to build factories. All that uncertainty adds a risk premium to Korean equities. Luna: So for an investor looking at EM right now, is Korea a buy the dip opportunity or a falling knife? Lucas: That really depends on your view of the semiconductor cycle. If you think the AI buildout has years to run and current weakness is just a seasonal inventory correction, then this selloff could be an entry point. Samsung is down about twenty-five percent from its high, Hynix down even more. But if you believe earnings estimates need to come down further, the valuation is not yet compelling. Luna: What are the key data points to watch in the coming weeks? Lucas: First, the June export data from Korea — that comes out on July 1st. If semiconductor exports continue to decline month-over-month, that's a confirmation. Second, any guidance from Samsung and Hynix when they report earnings in late July. Third, the capex plans from the big US tech companies. If Microsoft or Amazon signal a slowdown, Korea will feel it. Luna: And on the currency side, the won-yen cross rate is a big one. If the yen weakens further, Korea loses more competitiveness. Lucas: Absolutely. The Bank of Korea has been intervening to support the won, but they can't fight the tide if the dollar stays strong. The trade-weighted dollar index is still near 119, even after a slight dip. That's a headwind for all EM currencies. Luna: It's interesting, because we've talked a lot about the divergence within emerging markets this year — Vietnam versus China, India versus Indonesia. But Korea's divergence is almost from itself: it was the best, now it's the worst. Lucas: That's a great way to put it. And it underscores a broader point about EM investing: the dispersion of returns is huge. You can't just buy an EM ETF and expect uniform performance. Country selection matters enormously right now. Luna: And stock selection within Korea too. Not all Korean companies are chip makers. There are some good consumer and financial plays that are less exposed. Lucas: Right. And if this selloff creates opportunities for long-term investors, it's worth digging into those names. But for now, the momentum is clearly against Korea. Luna: Lucas, I want to step back for a second. If today's breakdown of Korea's export machine and the chip cycle was helpful for listeners, I think it's worth mentioning that this show stays ad-free thanks to listener support. Lucas: Yeah, that's true. We don't run ads, we don't have sponsors. If you've gotten value from these episodes, you can keep it going at buy me a coffee dot com slash fexingo. It's a simple way to say 'this is useful' and it makes a real difference. Luna: Exactly. No pressure, but if it's added something to your week, that's the place. Okay, back to Korea. Lucas: So where do we go from here? I think the key is to watch the won and watch the export data. If the won stabilizes and chip exports bottom, Korea could bounce hard. But the risk is that this is the start of a longer correction. Luna: And for listeners who are in Korea or thinking of getting in, what's your takeaway? Lucas: Be patient. Don't try to catch a falling knife. Wait for the data to confirm a turn. And if you're a long-term believer in the AI theme, Korea is still the factory floor — but the factory is going through maintenance right now. Luna: Well said. Thanks Lucas. Lucas: Thanks Luna. We'll keep watching.