Multi-Asset view on: Why Taiwan’s election matters for investors

Countries representing around half of the world’s population will hold national elections this year. One of the first to go to the polls will be Taiwan, where a new president will be chosen on 13th January. This is an important election in geopolitical terms as the result will help to shape the country’s future relationship with China, which claims sovereignty over Taiwan. The strategic importance of Taiwan and its crucial role in supplying semiconductors mean this election will be watched closely by investors.

Why is the election important?

Semiconductors, also known as microchips or simply ‘chips’, are used in everything from mobile phones and computers to cars, medical devices and military equipment. They are also vital in the rapidly growing arena of artificial intelligence (AI), providing the computing ‘brainpower’ for data processing and mathematical calculations.

In the early days of computing, semiconductors were mostly produced in the US. However, over time, supply chains were increasingly moved offshore to utilise cost-effective labour. Today, Taiwan is responsible for producing more than 60% of the world’s semiconductors and over 90% of advanced ones. Semiconductor factories, also known as foundries, are incredibly expensive to build and operate, so global manufacturing is reliant on established players. The largest operator of these foundries is Taiwan Semiconductor Manufacturing Company (TSMC), which accounts for around 56% of the global market. It is the world’s primary source of advanced semiconductors, and these chips are used by Apple, Nvidia, AMD and Qualcomm amongst others. If the flow of chips from Taiwan was disrupted, it would have far-reaching consequences.

Clearly, semiconductors are important to everyone, including China. Beijing’s plans to establish the country as a global leader in manufacturing and compete with Western nations in innovative technologies like AI all rely on semiconductors. The aim of the Chinese leadership is to reduce dependence on imported semiconductors and achieve self-sufficiency in advanced chip production. Taiwan could play a critical role in this.

Taiwan is also important to China from a military perspective. Along with Japan, South Korea and the Philippines, Taiwan is one of the links in a US-friendly chain of territories that limits China’s influence in the Pacific. Controlling Taiwan would give China a dominant position in the East and South China Seas, where there are trade routes crucial to the US and its allies.

So Taiwan’s semiconductors and its relationship with China are hugely important. And, the election on 13th January will have an important bearing on the next chapter in this story and the extent of China’s influence over Taiwan.

In the background, the possibility remains that China could invade Taiwan, something Beijing has never officially ruled out. This would be catastrophic for global supply chains, as well as the global economy. However, we see this as an unlikely outcome, especially in the near term, because of the high military and economic costs, the likely sanctions that would be imposed on China and uncertainty about whether Beijing would even be successful.

Who are the candidates?

Presidential elections are held every four years in Taiwan and the current incumbent, Tsai Ing-wen, is not eligible to stand again as she has served two terms. There are three candidates standing and all support variations of the current status quo, sharing the view that formally declaring independence is not needed but the threat of China should not be ignored.

Taiwan’s current vice president, Lai Ching-te, is vying to keep the ruling Democratic Progressive Party (DPP) in power. The DPP has the strongest stance against China and is seeking to bolster Taiwan’s defences and further strengthen relations with the United States. Hou Yu-ih is the Kuomintang (KMT) candidate, who is in favour of engaging with China economically and argues that the DPP’s stance on China is dangerous and could end in war. A win for the KMT would mean closer ties with China. The third candidate is Ko Wen-je, from the Taiwan People’s Party (TPP). Ko founded the party and has positioned it as an anti-establishment option, gaining strong support from younger voters. He also looks to appeal to voters as a middle-of-the-road option between the DPP and KMT with respect to relations with China, although the party’s stance is closer to the KMT’s.

What do we expect to happen?

Lai has been consistently ahead in the polls and has extended his lead further recently. The latest poll on the My Formosa website puts Lai at 39.6%, Hou at 28.5%, and Ko at 18.9%. In November, the KMT and TPP attempted to form a joint ticket, which would have put them in a strong position to win the election. However, the parties could not agree whether Hou or Ko would be the primary candidate and the plan collapsed.

Despite Lai’s lead, Hou cannot be ruled out and if he enters power, increased political and economic cooperation with China could offer certain benefits. However, it could also raise concerns about potential pressure on TSMC to share technology or shift its operations. This would alter the global chip landscape and potentially impact Western economies.

A win for Lai would mean continued US-Taiwan cooperation and TSMC's dominant position in the semiconductor market could further solidify Taiwan's position as a tech powerhouse, potentially leading to increased foreign investment and technological advancements. However, it could also exacerbate tensions with China.

Given the potential political and economic ramifications, we are closely watching the election. Our base case is that Lai’s DPP will remain in power and the approach to relations with China will continue along similar lines. However, if the KMT wins, we could see moves towards greater economic engagement with China over the medium term.

Whatever the outcome of the election, Taiwan and its relationship with China will continue to be monitored with keen interest around the globe.

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