Foreign investors, once unable to imagine a Chinese invasion of Taiwan, are now taking steps to prepare for the increasingly plausible scenario, according to recent developments. The threat of a military conflict has escalated, especially following U.S. President Donald Trump’s trade tariffs that have further strained U.S.-China relations.
Investor Uncertainty and Taiwan’s Vulnerability
Taiwan, a democratically governed island, has been a point of contention between the U.S. and China for years. However, since Trump’s presidency, relations have worsened, causing heightened investor fear. If China were to attempt to annex Taiwan, it could lead to war and significantly alter the island’s economy, potentially removing its market identity and its currency. Investors are faced with a stark choice: stay invested and hope for the best, or stay away entirely.
“You can’t settle any trades, the currency might disappear altogether,” said Mukesh Dave, chief investment officer at Aravali Asset Management in Singapore. “You either carry on like it’s business as usual, or stay away.” The odds of a Chinese invasion have increased, and betting platform Polymarket now estimates the likelihood at 12%, compared to almost none earlier this year.
Capital Flight and Geopolitical Concerns
Concerns over tariffs and the economy have led foreign investors to pull nearly $11 billion out of Taiwanese stocks this year. Despite this, there has been a tentative return in May. The benchmark index for Taiwan is down 6% this year, reflecting the mounting fears surrounding the island’s security.
The U.S. has long followed a policy of “strategic ambiguity,” not clearly indicating whether it would respond militarily to a Chinese attack on Taiwan. However, President Joe Biden has stated that U.S. forces would defend Taiwan. Despite this, geopolitical tensions under Trump, including his rhetoric on global order and his stance on Russia’s invasion of Ukraine, have cast doubts on U.S. protection for Taiwan.
TSMC: The Crown Jewel and Its Strategic Importance
Central to the Taiwan investment story is Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker. TSMC, which powers major companies like Nvidia and Apple, has been a key driver of the stock market’s growth. Many investors believe that TSMC’s importance to the global supply chain will lead the U.S. to defend Taiwan in the event of an invasion.
However, TSMC has also been affected by Trump’s tariffs. Despite this, it remains a critical asset, and many believe the U.S. will continue to strongly protect Taiwan, particularly due to TSMC’s significance.
Risk Management and Diversification
While there may be no way to hedge directly against a potential war, investors can hedge against market declines driven by fear. Some fund managers believe diversifying investments is the best strategy. Li Fang-kuo of Uni-President’s securities investment advisory unit in Taiwan remains skeptical about overestimating the geopolitical risk of war, arguing that the key issue is more likely to be the impact of tariffs.
Rich Nuzum of Mercer, a global pension fund adviser, notes that stress-testing for such crises is becoming more common. “I think stress-testing for crisis is being done more and more,” he said, reflecting the growing awareness among investors of the need to prepare for geopolitical uncertainties.