Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / China's Tech Rout Is Splitting Emerging Markets
Transcript
- Lucas: So China's internet names just had one of their worst weeks in recent memory, while the rest of emerging markets is powering ahead. The iShares China ETF, FXI, is down four and a half percent over five days, but look at Korea, the EWY ETF up over ten percent in the same stretch. That's a massive divergence. Luna: Yeah, and it's not just the ETF. JD fell thirteen percent this week. PDD nearly nine. These are big moves for mega-cap Chinese tech. Lucas: Right, and the thing is, this isn't just a China story. It's a sign that emerging markets are splitting into two camps: those riding the AI wave and those stuck in the trade crossfire. And before we dive into the numbers, 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 of these. If walking through the economy with us has made something click, that link is there. Luna: And it keeps this show ad-free, which I think we all appreciate. Lucas: Exactly. So let's get into it. The trade deficit numbers just came out for June, and they're still massive — negative seventy-three billion for goods and services. That's actually an improvement from the prior month, but the current account deficit is widening. And that's pressuring the dollar, which should help emerging markets, but it's not helping China. Luna: Why is that? Because the dollar has actually weakened a bit, the trade-weighted index down from 119.5 to 119.1. That's usually a tailwind for EM. Lucas: It is, and we're seeing it in Korea, Taiwan, even India. But China is the outlier. And I think it comes down to two things: the AI trade and the structural issues in Chinese tech. Korea and Taiwan are selling the picks and shovels of AI — semiconductors, hardware. China's internet giants are more exposed to consumer spending, regulatory overhang, and now this AI displacement fear. Luna: That AI displacement fear — you mean the idea that AI is eating into their core businesses? Lucas: Exactly. Look at JD, PDD, BABA — e-commerce and advertising. AI is changing how consumers discover products, and these platforms are having to spend heavily on AI just to defend their margins. Meanwhile, the AI adopters, the ones using AI to boost productivity, are seeing their stocks rally. It's a tale of two markets. Luna: And the numbers back that up. The broad EM ETF, EEM, is up two percent this week, but the China-specific ETFs are down four to seven percent. That's a huge gap. Lucas: Right, and it's not just this week. Since the AI boom really took off, we've seen this persistent divergence. But this week, the gap widened to an extreme. And I think part of it is the trade deficit news. The US trade deficit is still huge, and that's fueling protectionist talk. That hits export-driven economies like China disproportionately. Luna: So is this a China-specific problem, or is it a signal for all emerging markets? Lucas: I'd say it's a signal for how you need to be selective in EM. The old days of buying the whole basket are over. You need to separate the AI winners from the AI losers, and the countries that are positioned for the new trade environment from those that aren't. Korea is a great example — up ten percent this week because it's a direct AI beneficiary. China is struggling because it's caught between trade tensions and a consumer slowdown. Luna: But China's also been the one pushing AI, like with DeepSeek and all that. Why isn't that helping? Lucas: That's a good question. DeepSeek showed you can build competitive AI with less compute, which is actually bearish for the hardware makers but should be bullish for the adopters. But Chinese tech companies are mostly adopters, not creators of the most advanced models. And the ones that are, like BABA with its cloud business, are still facing regulatory and geopolitical headwinds. Luna: So the market is punishing them for not being at the frontier. Lucas: Exactly. And the data we're seeing in the flows supports that. Look at the KWEB ETF, down seven percent this week. That's the Chinese internet basket. It's underperforming even the broad China ETF, which tells you the pain is concentrated in tech and e-commerce, not in state-owned enterprises or financials. Luna: What about the regulatory side? Any new crackdowns we should know about? Lucas: Nothing new this week, but the overhang is still there. The government's push for data security and platform oversight hasn't gone away, and that keeps a lid on valuations. Plus, there's the education and gaming sectors, which have been hit before. It's a lot of uncertainty for investors to price in. Luna: And then you have the broader macro picture. The yen strengthened a bit this week, and that usually pressures the carry trade, which can hit EM. But the dollar is weakening, which should offset that. So it's a mixed bag. Lucas: Right, and the yen is at 157.5 per dollar, down from 158.45. That's a meaningful move. And if the Bank of Japan keeps tightening, that could cause more volatility in EM as carry trades unwind. But so far, the impact has been selective. Korea and Taiwan are holding up because they have strong AI demand. China is more sensitive to global risk appetite. Luna: So if I'm an investor, how do I play this? Do I avoid China entirely? Lucas: I wouldn't say avoid entirely, but you need to be more discerning. There are still value opportunities in Chinese companies that are cash-generative and have strong fundamentals, like some consumer names or even certain tech names that are trading at single-digit P/E ratios. But you have to be prepared for volatility and headline risk. Luna: But the trend seems to be favoring the AI winners. Is that sustainable? Lucas: That's the million-dollar question. If the AI capex cycle continues, Korea and Taiwan could keep rallying. But if there's a slowdown in AI spending, those markets could correct just as fast. The key is to watch the earnings of companies like NVIDIA and the big cloud providers. If they keep beating expectations, the trade continues. If not, watch out. Luna: And what about the broader EM picture? With the dollar weakening, is that a tailwind for all EM? Lucas: It should be, but the data shows it's not. The trade-weighted dollar is down, yet we're seeing this divergence. That tells me the dollar is not the only factor. It's about where each country sits in the global supply chain and the AI value chain. That's the new reality. Luna: So it's not just about beta anymore. Lucas: Not at all. You have to be a stock picker, or at least a country picker. The days of just buying the EEM and hoping for the best are behind us. You need to understand the dynamics we're talking about — AI exposure, trade balance, regulatory environment, political stability. Luna: And speaking of trade, the deficit is still widening. How does that play into this? Lucas: The US trade deficit is a double-edged sword. On one hand, a weaker dollar helps US exports, but it also makes imports more expensive, which can fuel inflation. And that puts the Fed in a tough spot. If they have to keep rates higher for longer, that's a headwind for EM capital flows. But right now, the market is betting on rate cuts, which is why we're seeing some EM strength. Luna: So the Fed is still the elephant in the room. Lucas: Always. And with the next FOMC meeting coming up in September, all eyes will be on the statement. If they signal a cut, that's a green light for EM. If they push back, we could see another leg down in China and other fragile markets. Luna: What about the oil price? With the situation in the Strait of Hormuz, that could be a wildcard. Lucas: Yeah, the headlines are concerning. Oil is a major input for many EM economies, and a spike could hurt importers like India, while benefiting exporters like Saudi Arabia. But so far, the oil price hasn't spiked dramatically. It's something to keep an eye on, though, because it could quickly change the dynamics. Luna: So bottom line, this week is a clear example of how EM is not a monolith. Lucas: Exactly. And I think the best takeaway for our listeners is to look beyond the index. Look at the underlying companies and their exposure to AI, trade, and domestic demand. That's where the opportunity — and the risk — lies. Luna: And for those who want to dig deeper, we'll have more in the coming weeks on specific country plays. Lucas: Absolutely. For now, the divergence is the story. China's tech rout is a reminder that in emerging markets, you can't just buy the whole basket and hope for the best. Luna: Well said. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to our listeners for tuning in. If you enjoyed this, consider supporting us at buy me a coffee dot com slash fexingo. It helps us keep doing this, ad-free.