Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Markets Are Decoupling Into Growth and Yield
Transcript
- Lucas: So, the iShares Emerging Markets ETF, ticker EEM, is up 1.7 percent over the past five days. Sounds like a quiet week. But underneath that, there's a violent split happening. Chinese internet names are getting hammered while Taiwan and South Korea are ripping higher. Luna: Yeah, JD.com down 11 percent, PDD down almost 8. Meanwhile the South Korea ETF is up 7.8 percent. That's a huge gap. Lucas: Right. And this isn't a one-week blip. It's a structural story that's been building for a while. The old idea of emerging markets as one monolithic asset class, where you just buy the index and get diversified exposure to growth, that's breaking down. Individual markets are diverging based on very different drivers. Luna: What are those drivers? It feels like AI is the elephant in the room. Lucas: AI is a big part of it. Taiwan and South Korea are the hardware backbone of the AI boom — TSMC and Samsung make the chips that every AI model needs. So capital flows into those markets as the AI capex cycle accelerates. China, on the other hand, is more of an AI adopter, and its internet platforms are facing regulatory and competitive pressures that are scaring investors. Luna: So the AI supply chain is creating winners and losers. But isn't that also tied to the trade picture? I mean, the US trade deficit is still massive. Lucas: Absolutely. The latest trade balance data from June shows the deficit at 73 billion, down from 77.6 billion the month before. That's a slight narrowing, but it's still huge. And the composition of that trade is shifting. We're seeing more imports of electronics and ai related components, which benefits Taiwan and Korea, while China's exports are getting squeezed by tariffs and diversification. Luna: So the market is rewarding the exporters and punishing the importers, or maybe it's more about who's gaining share in the AI trade. Lucas: Exactly. And it's not just AI. There's a broader story about yield. Emerging market dividend stocks are making a comeback. Look at Brazil and Mexico — they're down over the past week, but they have strong dividend payers in utilities, consumer staples, and financials. Investors are starting to treat those as bond proxies, especially with US rates uncertain. Luna: Interesting. So we're seeing a split between growth-driven markets like Taiwan and Korea on one hand, and income-driven markets like Brazil and Mexico on the other. And then China is stuck in the middle, with regulatory and geopolitical overhang. Lucas: That's the emerging market landscape in 2026. And it's a challenge for index investors. If you buy EEM or VWO, you get a blended exposure to all these diverging stories. But the correlations have dropped. The diversification benefit is still there, but you're also getting a lot of noise. It's not a one-size-fits-all bet anymore. Luna: So what's the practical takeaway for someone listening? Should they ditch the index and pick individual countries? Lucas: I wouldn't say ditch the index, but I'd say be aware of what you're actually owning. If you want pure AI exposure, you might be better off with a Taiwan or Korea ETF. If you want yield, maybe look at Brazil or Mexico. The index is a compromise. It's fine for broad exposure, but it's not going to give you the full upside of the best-performing markets. Luna: And the downside is that you're also holding the laggards. China is a big weight in EEM, and it's been dragging. Lucas: Right. China's internet names, like Alibaba, JD, Baidu, are all down significantly. The KWEB ETF is down over 6 percent in five days. That's a lot of pain for index holders. But it's also an opportunity for selective investors who think the regulatory fears are overblown. But that's a separate debate. Luna: Let's get back to the yield story. You mentioned Brazil and Mexico. Can you give a concrete example of what's attractive there? Lucas: Take Brazilian utilities. They've been historically high dividend payers, and with interest rates in Brazil starting to come down, those stocks become more attractive. The dividend yield on the iShares Brazil ETF is around 5 percent, which is pretty compelling for income investors. Mexico has similar stories in its consumer and banking sectors. Luna: So it's like a re-rating of emerging markets from pure growth to also income. That's a shift we've seen in developed markets, but it's new for EM. Lucas: Exactly. And it's part of the broader decoupling from the US dollar. The trade-weighted dollar index has dipped slightly to 119.1, and that can help EM currencies and local-currency assets. But the bigger point is that EM stocks are pricing in different futures. You can't paint them all with the same brush. Luna: So if I'm an investor, how do I choose between Taiwan and Brazil? It feels like two completely different bets. Lucas: It's really about your time horizon and your risk appetite. Taiwan and Korea are high-beta plays on AI adoption. If the AI boom continues, they could keep outpacing. But they're also vulnerable to a sudden pullback if AI sentiment turns. Brazil and Mexico are more about steady cash flows. They might not double overnight, but they offer a cushion with dividends. Luna: And then there's the currency angle. If the dollar weakens, EM local currency returns get a boost. That's another layer. Lucas: Right. The dollar is off its recent highs, but it's still strong historically. If it starts to weaken more meaningfully, that could be a tailwind for EM as a whole. But again, it would benefit the more fundamentally sound markets more than the ones with structural issues. Luna: So the emerging market story is no longer one story. It's a collection of regional tales. Lucas: That's a good way to put it. And that's why we do this show — to help you navigate the nuance. Speaking of which, a quick note on the show itself: this podcast is ad-free, and it's only possible because of listener support. If you've gotten value from our episodes, a couple of dollars a month at buy me a coffee dot com slash fexingo genuinely keeps us going. It's a small thing, but it makes a real difference. Luna: Yeah, it really does. We keep the lights on without any corporate sponsorship, so every bit helps. And it lets us keep digging into these stories. Lucas: So back to the split. One way to think about this is that emerging markets are starting to resemble developed markets in their dispersion. You have growth leaders and dividend payers, and the correlation between them is falling. That's a challenge for asset allocators, but it's also an opportunity for active managers and individual stock pickers. Luna: But doesn't that also make it harder for the average investor? The ETF used to be the easy button. Lucas: It does. But I think the answer is to be more deliberate about which EM exposure you want. If you're a long-term investor, you might hold a core EEM position, but then tilt with satellite positions in specific countries or sectors. That way you get diversification but also some potential alpha. Luna: And for the income-oriented investor, maybe that means looking at the dividend ETFs that focus on EM. There are a few out there now. Lucas: Exactly. The market is evolving, and the tools are evolving with it. The key is to not treat EM as a monolith. Look at the actual drivers, the actual numbers, and the actual risks. That's what we try to do every week. Luna: And we'll keep watching those numbers. Next week, maybe we can dive deeper into the AI hardware vs. software trade. That seems to be the big one. Lucas: That's a great idea. Until then, keep an open mind and a diversified portfolio.