Taiwan’s president, Tsai Ing-wen, has repeatedly pledged to uphold peace and avoid provocation. She has offered talks with China, but has also said Taiwan will defend itself if attacked.
Russia’s invasion of Ukraine early last year has also made investors more wary of war risk, analysts said.
“In Europe, since some investors have … made quite a few losses in Russia, from a risk management point of view, they can’t afford it if something goes wrong in the Taiwan Strait,” said a senior analyst at a U.S. fund house, who declined to be named because of the sensitivity of the topic.
LOW ODDS, HIGH SHOCK
“Realistically, if there is ultimately a conflict between China and Taiwan, I think the ramifications are going to be far more severe than necessarily worrying about which company you should be holding in the markets,” Malcolm said. “Even if you parked all your assets in the U.S., you’d still be very significantly exposed given the profound direct and indirect economic linkages to China and Taiwan.”
Some funds have reduced their exposure in China and are instead seeking names that provide insulation from geopolitical tensions.
Jordan Stuart, client portfolio manager at Federated Hermes, says he cut China exposure last year while holding onto some small stocks that can “fly under the radar”.
“If things stay stagnant, or escalate, what we’re going to pivot to is the more industrial and capex cycle on the reshoring trade … instead of owning global industrial companies that have exposure to China or elsewhere,” he said. “I’m going to go smaller, more domestic names, that would play into that capex cycle.”
A Chinese invasion of Taiwan would also cause significant supply chain disruptions and turmoil in global markets such as the ones brought about by the COVID-19 pandemic and Russia’s invasion of Ukraine.
The Taiwan Strait is a major route for ships transporting goods from East Asia to the United States and Europe. Taiwan has also emerged as a key battlefront in the chip industry supply chain.
“China wouldn’t have to invade Taiwan or actually get hot to just cause a stir in that part of the market,” Stuart said. “That bottleneck can cause absolute disruption in the global economy. I think that’s underestimated.”
