Investors are bracing for a volatile reception to Taiwan's election on Jan. 13, with added focus on the island's chip sector, after China said the poll was a choice between "peace and war".
In an election-packed 2024, Taiwan will be the first major economy to vote as it holds presidential and parliamentary elections on Saturday, pitting the three main parties, the ruling Democratic Progressive Party (DPP), the Kuomintang (KMT) and the Taiwan People's Party (TPP), against each other.
Both the TPP and KMT have pledged to re-start dialogue with China if they win the presidency. China claims Taiwan as its own territory despite strident objections from Taipei and has never renounced the use of force to bring it under Beijing's control.
The election comes under the dark clouds of escalating tensions with China, keeping investors jittery, with Taiwan also the main flashpoint in U.S.-China tensions.
Despite these jitters, Taiwan's stock market (.TWII) soared last year, gaining 27% last year, its strongest yearly performance since 2009, and foreign investors pouring in $3.45 billions in Taiwan equities.
Here are some scenarios and how markets are likely to react:
RULING DPP WINS PRESIDENCY, LOSES PARLIAMENT MAJORITY
A DPP victory is likely to lead to what some investors say will be a short-term sell-off in Taiwan stocks and Taiwan dollar , with a risk-off environment weighing on chip and tech stocks.
Taiwan is a major manufacturer of chips used in everything from cars to smartphones and fighter jets and is home to the world's largest contract chipmaker Taiwan Semiconductor Manufacturing Co Ltd (2330.TW). Shares of TSMC, Asia's most valuable publicly listed company, surged 32% in 2023.
The focus after the election will be on MSCI's broadest gauge of Asian tech stocks outside Japan (.MIAPJIT00NUS) along with U.S. chipmakers Intel (INTC.O), Nvidia (NVDA.O), Micron (MU.O) as well as the broader PHLX semiconductor index (.SOX).
Some investors might buy the dip.
A manager of a Taiwan-based fund house, which oversees T$18 billion ($578.61 million) of client assets in Taiwan stocks, sees any selloff as a buying opportunity for TSMC and other chip-related and AI shares. The fund manager declined to be identified due to the sensitivity of the matter and regulatory restrictions.
The spotlight though will be squarely on how China reacts to a DPP victory, after China warned voters on Thursday that the DPP candidate was dangerous and risked triggering cross-Strait confrontation and conflict.
China could conduct military demonstrations around Taiwan, including large-scale air and naval manoeuvres, according to a desk note from Lazard's geopolitical advisory team.
"The core message of any military display would be that Beijing is willing to use force in the future if necessary to accomplish unification."
Investors point out that the new president will be inaugurated in May, providing time for investors to assess the fallout of the election.
For China markets, the immediate reaction might be limited, according to investors. They highlight the growing need of an economic stimulus for the stuttering China economy to be the likely trigger for improvement in sentiment and drastic movements in the market.
"We do not think the outcome of the Taiwan elections will have a meaningful impact on the China markets or the yuan," said Gary Tan, senior portfolio manager, Allspring Global Investments. "We see domestic issues such as government increasing focus to contain financial risk amidst a challenging economy as more important drivers."
KMT WINS PRESIDENCY
A victory the KMT, which is closer to China than the DPP, would likely result in Taiwan dollar spiking higher and shares rallying over expectations that the ties between China and Taiwan would improve.
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management said there could be volatility one way or another.
"But will the underlying picture changed dramatically on the day after election? I doubt very much that it will," he said. "It will take several more weeks, if not months, for people to figure out the new modus operandi."
Analysts though said an opposition victory may raise the risks of China ramping up integration plans for Taiwan and cast a shadow on the semiconductor supply chain.
"Nobody knows exactly what will happen after the election this Saturday... The outcome shouldn't be so extreme as a war launched by China," said the Taiwan-based fund manager.
($1 = 31.1090 Taiwan dollars)
(This story has been corrected to clarify that the Taiwan election will take place on Jan. 13, not Feb. 3, in paragraph 1)
