Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How EM ETF Flows Reveal a Diverging Market
Transcript
- Lucas: Let me start with a number that caught my eye today: the iShares MSCI Emerging Markets ETF, ticker EEM, is down nearly four percent over the past five trading days. At the same time, the China-focused FXI is up almost three percent. That's a seven-point gap between two ETFs that both sit in the 'emerging markets' bucket. Luna: So the label 'emerging markets' is hiding a lot of divergence right now. Which countries are driving the EEM down? Lucas: South Korea is a huge part of it. The EWY ETF, which tracks Korean stocks, is down a staggering ten percent in five days. That's a crash by any standard. And it's not just Korea — Taiwan's EWT is off six percent. Those two heavyweights are dragging the whole index. Luna: Right, because EEM weights countries by market cap, so Korea and Taiwan together are a big chunk. What's going on there? Lucas: Korea is in the middle of a currency crisis. The won has been plunging, and that forces the central bank to hike rates or intervene, which hurts stocks. Taiwan is feeling the spillover because its tech exports are sensitive to the same global slowdown fears. Meanwhile, China is bucking the trend. Luna: FXI up nearly three percent, and the KraneShares China Internet ETF, KWEB, up over four percent. That's a rally. Lucas: Exactly. Chinese tech stocks like Pinduoduo, ticker PDD, are up over eight percent in five days. Alibaba and JD.com are also up. The market seems to be pricing in a stimulus bounce — the government has been hinting at more support for consumption. And the yuan is holding relatively stable at 6.79 per dollar. Luna: Compare that to the won, which has been in freefall. The yen is also weak at 160 per dollar, but that's more of a slow bleed. Korea is a crisis. Lucas: And then you have India. The INDA ETF is basically flat, up 0.2 percent. India is in a sweet spot — it's not as exposed to the currency turmoil because its central bank is pretty hawkish, and its economy is more domestically driven. It's becoming a haven within EM. Luna: So we have three distinct stories: Korea in crisis, China rallying on stimulus hopes, and India chugging along. What does that tell us about the broader EM thesis? Lucas: I think it tells us that the old idea of 'buy EM for diversification' is dead. You have to be country-specific. The days when you could just buy EEM and call it a day are over. The dispersion is too wide. Luna: And the common thread is the dollar. The trade-weighted dollar index is still at 120.7, down a hair from 121.15 last week, but it's still incredibly strong. A strong dollar crushes countries with dollar-denominated debt. Lucas: That's exactly right. Korea has a lot of corporate debt in dollars, so when the won falls, their debt burden spikes. China, on the other hand, has massive reserves and capital controls, so it can manage the pressure better. And India has relatively low external debt. Luna: We also saw the U.S. trade deficit widen to over 77 billion in May, down from 54 billion the month before. That's a huge swing. Imports are up, exports aren't keeping pace. That trade deficit is a symptom of a strong dollar making U.S. goods expensive. Lucas: And it's a feedback loop: strong dollar widens the trade deficit, which eventually weakens the dollar over time, but in the short term, it squeezes EM countries that rely on exports. Korea's export machine is taking a hit. Luna: So for an investor, what's the play? If you have to pick one EM country right now, which one stands out? Lucas: If I had to pick one, it would be India. The structural story is intact — demographics, digital adoption, manufacturing push. And it's relatively insulated from the currency wars. But I'd avoid Korea until the won stabilises. China is tempting on stimulus, but it's a policy-driven rally, not a fundamental one. Luna: And that's the key distinction: policy-driven versus structural. A lot of investors chase the rally in China and then get burned when the stimulus fades. India's growth is more organic. Lucas: Right. And we're seeing that play out in the data. India's PMI is still expansionary, its forex reserves are healthy. Korea's PMI is contracting, and its reserves are dwindling as the central bank tries to defend the won. Luna: Speaking of which, the Bank of Korea raised rates again last week, but it didn't stop the sell-off. The market is testing them. Lucas: Yeah, rate hikes alone won't fix a confidence crisis. They need to address the underlying debt problem. But that's a longer-term fix. Luna: So what should listeners watch for in the next few weeks? Any key data points? Lucas: I'd watch the yuan fixings. If China lets the yuan weaken, that could trigger another wave of EM selling. Also, the Fed's next move. Any hint of a pause or cut would be a huge relief for EM currencies. And of course, export data from Korea and Taiwan — that's the canary. Luna: Let me ask you this: given the complexity, do you think the average retail investor should even bother with individual EM stocks, or stick with broad ETFs? Lucas: I'd say broad ETFs are fine if you're taking a long-term, buy and hold approach. But if you're trying to time it or trade actively, you need to pick countries. The dispersion is too high to just buy EEM and hope for the best. Luna: Good advice. And speaking of making sense of the economy, if walking through these market dynamics with us has made something click for you, we just want to mention that listener support is what keeps this show ad-free and independent. If you find value in our deep dives, you can support us at buymeacoffee.com/fexingo. No pressure, just a simple way to help us keep going. Lucas: Yeah, we really appreciate the listeners who've helped out. It allows us to spend the time digging into numbers like these instead of chasing ad revenue. Back to the markets — one more thing I want to highlight: the divergence between commodity exporters and importers. Luna: Good point. Brazil's EWZ is up slightly, probably thanks to oil and iron ore. Mexico's EWW is flat. Commodities are holding up. Lucas: Exactly. If you're an oil exporter like Brazil or Colombia, the strong dollar isn't as painful because your revenues are in dollars. But if you're a manufacturer that imports parts and sells locally, like Korea or Turkey, you get squeezed from both sides. Luna: So the EM world is splitting into commodity winners and manufacturing losers. At least for now. Lucas: And that's a theme we'll keep watching. In the meantime, if anyone wants to share their own EM country picks, we'd love to hear from you. You can find us on the Fexingo network. Luna: Thanks for tuning in. We'll be back with more on Wednesday.