Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Korea and Taiwan Bear the Brunt of EM Selloff
Transcript
- Lucas: So it's been a rough week for emerging markets. The broad EM ETF, EEM, is down nearly three percent over the last five days. But the real carnage is concentrated in a couple of places. Luna: You're looking at South Korea and Taiwan, right? EWY is down five and a half percent, EWT almost four percent. Those are big moves for a week. Lucas: Right. And the question is why these two specifically. Because it's not a broad EM panic — Brazil is only down one percent, Mexico less than that. So something is hitting the Asian tech-heavy markets harder. Luna: Well, the obvious culprit is the Nvidia story. The headline this morning — Nvidia says it's 'largely conceded' China's AI chip market to Huawei. That's a huge deal. Lucas: It is. And it ripples directly through Korea and Taiwan because they're the ones making the components. Samsung Electronics and SK Hynix in Korea, TSMC in Taiwan — these are the suppliers that would have benefited from Nvidia selling into China. If Nvidia is pulling back, that demand evaporates. Luna: And it's not just Nvidia's own revenue. It's the whole supply chain. TSMC makes the chips, Samsung makes the memory, they all lose a growth vector. Lucas: Exactly. Now, the Korea discount is a well-known phenomenon — Korean stocks have historically traded at a discount to global peers because of governance issues, the chaebol structure, geopolitical risk. But this week, it's not about the Korea discount per se. It's about a specific revenue shock. Luna: But Taiwan has its own risk premium too. The strait, the China threat — that's always priced in. So why is EWT down more than EWZ or EWW this week? Lucas: Because Taiwan's exposure to the semiconductor cycle is the highest in the world. TSMC alone is over thirty percent of the Taiwan Weighted Index. When the AI chip narrative shifts, Taiwan feels it more acutely than, say, Brazil, which is mostly commodities and domestic consumption. Luna: So is this a buying opportunity? These markets have sold off, but is the underlying thesis broken? Lucas: That's the million-dollar question. Let's look at the numbers. South Korea's EWY is at 180 — that's down from around 200 in February. Taiwan's EWT at 92, down from over 100. So we've had a correction, not a crash. But the Nvidia-Huawei dynamic suggests the China AI chip market is shifting permanently to domestic players. That's a structural headwind. Luna: But Nvidia still dominates everywhere else. And the demand for AI chips globally is exploding. So TSMC and Samsung should still benefit, just not from China. Lucas: Right. The question is how much of their growth was China-dependent. For Nvidia, China was maybe fifteen to twenty percent of data center revenue. For TSMC, direct China exposure is smaller — maybe eight to ten percent. But the indirect exposure through customers like Nvidia, AMD, Broadcom — that's larger. Luna: And then there's the geopolitical overlay. The Biden-era export controls are still in place, and now with the Trump administration in 2026, the policy seems to be even tougher. Huawei's Ascend chips are actually competitive now, according to reports. So it's not just a ban — it's a genuine alternative. Lucas: That's the key. A few years ago, Huawei's chips were years behind. Now, for inference workloads, they're reportedly within spitting distance. Nvidia's comment that they've 'largely conceded' the market is telling. They're not just complying with export rules — they're acknowledging they can't win that business even if the rules were relaxed. Luna: But let's bring it back to the ETFs. What do you tell an investor sitting on EWY or EWT right now? Do you hold, sell, or add? Lucas: I'd look at valuations. South Korea's KOSPI is trading at about nine times forward earnings. That's cheap. Taiwan's TWSE is at about fourteen times. Neither is bubble territory. But the catalyst to re-rate higher might be delayed. The semiconductor downcycle might last longer if China demand drops off. Luna: And then there's the China factor more broadly. The yuan is weakening — it's at 6.81 per dollar, up from 6.79. That's a slow grind, but it pressures all EM Asia currencies. The Korean won and Taiwanese dollar both tend to weaken with the yuan. Lucas: So a double hit: earnings downgrades from the Nvidia news and currency headwinds. That explains the magnitude of the selloff. Luna: But what about the other EM tech markets? China itself — KWEB is down almost four percent. That seems more straightforward — the China internet story has been under pressure for years. Lucas: Right, but look at Pinduoduo, ticker p d d. It's actually up two point seven percent this week. So it's not a uniform China selloff. Some Chinese tech companies that are domestic-focused or have strong value propositions are still finding buyers. Luna: That's interesting. So the Nvidia news is hitting the hardware supply chain harder than the internet platforms. Lucas: Exactly. The internet platforms are more about consumer spending and regulation. The hardware story is about export controls and technology decoupling. Different drivers. Luna: We should also mention India. INDA is only down point seven percent. India is less exposed to the semiconductor trade. Their tech is more IT services and domestic digital. Lucas: Good point. India is a different EM story — demographics, domestic reform, less tied to the China cycle. So the selloff this week is really Asia export-manufacturing specific, not em wide. Luna: Lucas, if this episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Lucas: Yeah, it's a small thing that makes a big difference. We don't run ads, and that's a choice. If you value that, the link is buy me a coffee dot com slash fexingo. Luna: Alright, back to the markets. So where do we go from here? Are Korea and Taiwan now priced for a recession, or is there more downside? Lucas: I'd say they're pricing in a moderate slowdown, not a collapse. The Korea discount is actually wider than usual — the KOSPI is at a forty percent discount to the MSCI World in price to book terms. That's extreme. But it could stay extreme if the geopolitical and trade headwinds persist. Luna: So a contrarian might start nibbling. But you need patience. Lucas: Patience and a view on semiconductors. If you think AI demand is a multi-year supercycle that will eventually overwhelm the China loss, then buying EWY or EWT here could work. If you think decoupling deepens and China builds its own ecosystem, then these markets face a structural growth downgrade. Luna: And the trade-weighted dollar index is at 119.3, up from 118.7 just last week. A strong dollar is another headwind for EM. Capital tends to flow out. Lucas: That's the macro overlay. The dollar index has been grinding higher since April. That's not helping any EM, but it hurts the open economies like Korea and Taiwan more because they rely on foreign capital. Luna: So the takeaway: this week's selloff is specific to Asia tech-exposed EMs, driven by the Nvidia-Huawei chip battle and a strong dollar. The broad EM story is more mixed. Lucas: And the key number to watch is the yuan. If the PBOC lets it weaken further, that will drag on the whole region. If they stabilize it, that could be a signal that the worst is over for now. Luna: Good place to leave it. Thanks for listening, everyone.