Chess
pieces are seen in front of displayed China and Taiwan's flags in this
illustration taken January 25, 2022. REUTERS/Dado Ruvic/Illustration Purchase Licensing Rights
No place to hide from any China-Taiwan conflict, investors say
SINGAPORE,
May 22 (Reuters) - Foreign investors could once barely imagine that
China would invade neighbouring Taiwan, but with Donald Trump as
president of the United States, many view it as a tail-risk scenario
they must prepare for, although they cannot find ways to do so.
The
democratically-governed island has long been a point of contention in
U.S.-China relations, which have worsened since Trump entered the White
House in January and launched trade tariffs that have rattled markets.
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Investors
fear that if China attempts to take over what it considers "sacred"
territory, it risks a war that ushers in the end of Taiwan as a market
with its own currency and identity, while the only other alternative is
peace and the status quo.
For investors, the choice therefore is to stay out completely or stay invested and hope for the best.
The
risk of any invasion is difficult to hedge, said Mukesh Dave, chief
investment officer at Aravali Asset Management, a global arbitrage fund
based in Singapore.
"You
can't settle any trades, the currency might disappear altogether," he
said. "You either carry on like it's business as usual, or stay away."
The odds of China invading Taiwan have risen to 12% on betting platform Polymarket from close to none earlier this year.
Skittish
foreign investors have pulled nearly $11 billion out of Taiwan stocks
this year, although much of that was fuelled by concerns over tariffs
and the economy and they made a tentative return in May.
The benchmark index (.TWII)
While
the United States has long stuck to a policy of "strategic ambiguity,"
on Taiwan, not making clear whether it would respond militarily to an
attack, Trump's predecessor, Joe Biden, said during his time in office
that U.S. forces would defend the island if China were to attack.
Rising
geopolitical tensions from Trump's talk of a new global order and his
disregard for Russia's takeover of swathes of Ukraine have raised doubts
about such U.S. protection for Taiwan.
While
Taiwan has lived under the threat of Chinese invasion since 1949 when
the defeated Republic of China government fled there after losing a
civil war with Mao Zedong's communists, the two sides have not exchanged
shots in anger for decades.
Yet, tension has simmered across the Taiwan Strait that separates the island from China. China's two-day war games around Taiwan in April further fuelled investor worries.
The latest barbs came this week as Taiwan President Lai Ching-te
used a news conference marking his first year in office to pledge peace
with China, only to have China's Taiwan Affairs Office say his remarks
were a "two-faced tactic" and that Taiwan cannot "stop the inevitable
trend of national reunification".
Lai,
whom China calls a "separatist", rejects Beijing's sovereignty claims,
saying only the island's people can decide their future.
Goldman
Sachs' Cross-Strait Risk Index, which gauges the intensity of
geopolitical risk by counting the number of news articles mentioning
tension, has been rising since Trump won the U.S. election last year.
"If
aggression toward Taiwan occurs, the investment decision becomes
binary: stay exposed and absorb extreme volatility, or exit swiftly to
preserve capital," said Steve Lawrence, chief investment officer of
Balfour Capital Group.
CROWN JEWEL
The Taiwan investment rationale centres on Taiwan Semiconductor Manufacturing Co (TSMC) (2330.TW)
TSMC, which counts Nvidia (NVDA.O)
and Apple (AAPL.O) as major clients and whose stock is listed in Taipei and New York, powered the stock market to record highs earlier this year.
"TSMC
is so big that the expectation among investors is the United States
will defend Taiwan, and defend it strongly," said Dave of Aravali. "That
is the hope."
Yet
TSMC has been in Trump's crosshairs as he unleashed tariffs in April
and later delayed some duties to negotiate with foes and allies alike.
Local
fund managers say while there may be no way for investors to hedge
against an actual war, they do have options to hedge against possible
market declines driven by fear of war.
However, Li Fang-kuo, chairman of Uni-President’s (1216.TW)
securities investment advisory unit in Taiwan, is sceptical of the need
for such hedging, as he believes foreign investors are misreading the
level of risk of a cross-strait war.
"We shouldn't interpret it from a geopolitical risk perspective. The key issue is the tariffs."
Rich
Nuzum, global chief investment strategist at pension fund adviser
Mercer, said his clients that have looked at the risk found the best
option was to diversify.
"I think stress-testing for crisis is being done more and more."
Reporting by Ankur Banerjee, Rae Wee, Tom Westbrook and Vidya Ranganathan in Singapore, Faith Hung in Taipei; Editing by Vidya Ranganathan and Clarence Fernandez