It’s a question being considered by plenty of investors right now: If China invades Taiwan which stocks would be impacted? This question is particularly pertinent in mid-January 2023 in the immediate aftermath of Taiwan’s election.
The country elected William Lai Ching-te as President, a figure who Beijing makes no secret of despising (both his party and him personally). He has said in the campaign trail that he sees Taiwan as an independent sovereign state and promising among other things to spend more on the local military and try and build closer relationships with other states. Wanting independence from Beijing has been something many of his predecessors may have believed privately, but been more cautious publicly, not wanting to be the trigger for China invading Taiwan. It is also clear that Xi Jinping sees ‘reunification’ as a goal of his, having noted publicly that it cannot be put off forever.
We still don’t see China invading Taiwan as something that could happen in the very short-term, it is not unrealistic to see it as something that could happen eventually and consider the impact. Bloomberg Economics has estimated the price would be $10tn, about 10% of global GDP. This would be even worse than COVID-19, the GFC and the War In Ukraine. In this context, it isn’t unreasonable to ask which stocks would be impacted, and how so. It could be bad news for some sectors, but good news for others.
If China invades Taiwan which stocks would be impacted?
Taiwan makes 90% of the world’s semiconductor chips, particularly through TSMC (Taiwan Semiconductor Manufacturing Company). TSMC is only behind Intel and Samsung amongst the biggest chip companies in the world. We suspect that one of the reasons China wants Taiwan is because it wants TSMC, given TSMC has the most advanced semiconductor manufacturing equipment in the world, specifically the Extreme Ultra Violet (EUV) manufacturing systems that could be used for military purposes. ASML sells plenty of these, to customers around the world (including the US) but none to China.
Obviously if China invaded Taiwan, it would be bad for investors in TSMC because it would become a state enterprise that only produces and sells semiconductor technology for itself. At least, in theory. It is plausible that TSMC might just shift its operations elsewhere – if successful, it might even be a better situation than the status quo because the world is so reliant on Taiwan. And it is building a facility in Arizona that it expects to be complete in 2025.
For other semiconductor stocks, there would be significant pressure on the price of chips – specifically massive inflation, and it would flow through to practically all end products from cars to mobile phones.
Stocks that rely on supply chains through the Taiwan Strait
The Taiwan Strait is one of the world’s busiest shipping lanes, as ships from North Asian factories (China and elsewhere) tend to pass through there. It is estimated that over 50% of the entire world’s shipping containers pass through it.
The invasion, even if it was quick and successful, would obviously dent global supply chains for at least the short term. And from there, companies relying on ships that transit through the Strait would be at the mercy of Beijing. We all saw post-COVID supply chain disruptions that led to shipping delays and price increases. An invasion of Taiwan would be this all over again, on steroids.
Even companies relying on the Strait via the air instead of by water would be impacted, as flight paths would inevitably have to change. Australia would see a significant impact given the Taiwan Strait forms part of a ‘straight line’ between China and Australia.
Even though those two are the ones that would be affected most directly, it is inevitable that all stocks would be impacted. We think it is highly plausible that there could be a substantial stock market crash as we saw at the outbreak of COVID-19 and during the GFC. There would be a significant global liquidity crunch, given how much China lends to the world, inevitable sanctions and consequences at the very least. And if the West decides to respond with military force, all bets are off. Of course, China too would be impacted as investors would seek to move money out of China, stop borrowing money and domestic economic confidence would fall.
Nonetheless, it is important to single out semiconductor stocks as important, because Taiwan’s own TSMC is one of the reasons why China wants Taiwan. It is also important to note companies that rely on the Taiwan Strait as a shipping route, that would be impacted.
Obviously, we all hope given all these potential impacts, that none of this comes to past. Unfortunately, the mere prospect of this has to be entertained by investors.
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