Rising tensions between China and Taiwan are increasingly shaping the outlook of global investors, who now face a stark binary decision: maintain exposure to Taiwanese markets and risk severe disruption, or retreat entirely in the absence of viable hedging strategies.
The longstanding geopolitical fault line separating Beijing from Taipei has grown more volatile in recent months. With Donald Trump back in the White House and renewing a confrontational trade policy, market uncertainty surrounding Taiwan has deepened. Investors previously assumed that a Chinese invasion of Taiwan was a remote possibility. Now, many describe it as a credible tail risk – improbable, yet potentially catastrophic.
Markets have reacted accordingly. Foreign investors have withdrawn nearly $11 billion from Taiwanese equities so far this year, according to exchange data. The exodus, initially driven by concern over Trump’s tariff regime, reflects a broader unease over geopolitical instability. Although some overseas funds made a tentative return in May, the Taiwan Stock Exchange Weighted Index (TAIEX) remains down 6% year-to-date.
The lack of any practical hedge against the consequences of a full-scale conflict is a key concern. “You can’t settle any trades, the currency might disappear altogether,” said Mukesh Dave, chief investment officer at Aravali Asset Management in Singapore. “You either carry on like it’s business as usual, or stay away.”
The difficulty in mitigating exposure to Taiwan-specific risk has underscored investor vulnerability. The Polymarket betting platform now assigns a 12% probability to a Chinese invasion, up from virtually zero at the start of the year. Tensions have been inflamed by China’s military exercises in April, as well as a rhetorical escalation surrounding the one-year anniversary of Taiwanese President Lai Ching-te’s inauguration. Lai reiterated his government’s commitment to peace while asserting that only Taiwan’s people can determine the island’s future. Beijing denounced his remarks as “two-faced”, reaffirming that reunification is “inevitable”.
At the heart of investor interest in Taiwan is Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker. TSMC’s strategic importance – as a supplier to firms such as Apple and Nvidia – has made it a cornerstone of the global technology sector and a symbol of Taiwan’s economic clout. The firm’s shares, traded in both Taipei and New York, helped propel Taiwan’s markets to record highs earlier this year.
However, TSMC has not been insulated from geopolitical pressures. President Trump’s imposition of tariffs in April, coupled with temporary suspensions as part of ongoing trade negotiations, has introduced fresh instability. Investors now see TSMC as both an asset of immense value and a geopolitical flashpoint.
“The expectation among investors is that the United States will defend Taiwan, and defend it strongly,” said Dave. “That is the hope.” Yet confidence in American commitments has weakened. Trump’s call for a new global order, paired with a lack of clarity on Washington’s stance regarding Russian advances in Ukraine, has contributed to scepticism over the US’s willingness to intervene in Taiwan’s defence.
While President Joe Biden had previously stated that the US would come to Taiwan’s aid in the event of a Chinese attack, the current administration has reverted to a position of strategic ambiguity. This uncertainty has made risk assessments difficult. Goldman Sachs’ Cross-Strait Risk Index – which tracks geopolitical tension based on media coverage – has trended upward since Trump’s electoral victory.
Some institutional investors have adopted a cautious approach. Steve Lawrence, chief investment officer at Balfour Capital Group, said: “If aggression toward Taiwan occurs, the investment decision becomes binary: stay exposed and absorb extreme volatility, or exit swiftly to preserve capital.”
Others remain unconvinced by the doomsday scenarios. Li Fang-kuo, chairman of Uni-President’s securities investment advisory division, believes investors are misjudging the likelihood of conflict. “We shouldn’t interpret it from a geopolitical risk perspective. The key issue is the tariffs,” he said.
Nevertheless, asset managers and pension funds are preparing for contingencies. Rich Nuzum, global chief investment strategist at Mercer, noted that clients are increasingly engaging in stress-testing. “I think stress-testing for crisis is being done more and more,” he said, adding that diversification remains the most effective long-term strategy.
While some local fund managers suggest limited tactical hedging may be possible to guard against short-term market swings, few believe it is feasible to construct a portfolio fully protected from a large-scale geopolitical rupture involving Taiwan.
