Taiwan stocks facing ‘big bully’ prompt Goldman retreat as cross-strait tensions inflict 20 to 40 per cent fund losses
- Taiwan’s benchmark index has lost almost 9 per cent this month, taking the decline this year to 22 per cent in US dollar terms
- China sent 26 warplanes into Taiwan’s air defence identification zone last week, the third-largest PLA sortie in 2022, after row over Taiwan Strait
While geopolitical risk has been a key market feature, signs of a spillover from specific stocks to the broader market are worrisome, according to Goldman Sachs. Four other reasons – Federal Reserve rate hikes, recession, US dollar strength and China slowdown – prompted the US bank to downgrade the market to underweight this month.
The benchmark TWSE Index or Taiex has slipped 22 per cent this year in US dollar terms, leaving the market US$429 billion poorer, according to Bloomberg data. The slump is worse than the 6 per cent drop in the Hang Seng Index and 12 per cent loss in the Tech Index in Hong Kong. The broader MSCI China Index slipped 10 per cent.
03:09
US President Joe Biden says US military will defend Taiwan if attacked
“The adjustment in risk perception, the realisation that the geopolitical game has now changed maybe forever because of the Russia-Ukraine environment,” said Rory Green, chief China economist at London-based research firm TS Lombard. This has led to “a shift in pricing”, he added.
Foreign minister Joseph Wu said while the military threat has intensified, “there’s no way Taiwan will cave in and surrender its sovereignty and democracy to the big bully”.
Cross-strait tension has long been a feature of Taiwan equities, historically impacting stocks or sectors with China exposure, according to Alvin So, a strategist in Hong Kong at Goldman Sachs. Lately, the broader Taiwan market has started to price the risk for the first time over the past decade, he said in a report last week. The Taiex’s 9 per cent setback this month, the worst since the pandemic in March 2020, underscores the point.
“The broader market is responding and becoming more sensitive to cross-strait risks amid reports of significantly greater military activity” from mainland China and the Ukraine invasion, he wrote. China’s macro and supply risks and geopolitical concerns are “more unfavourable to Taiwan” than the South Asian markets, he noted.
China considers Taiwan as a renegade province and must be reunited with the mainland, by force if necessary. Some investors do not believe an invasion is imminent, suggesting that the risk may be overblown.
“It’s not our call that we see a military conflict in the short term,” Christian Nolting, global chief investment officer at Deutsche Bank International Private Bank, said at a media briefing on June 23. “And from that perspective, we do not think it has a major impact at this point in time.”
Money managers in Taiwan are reeling nonetheless. Some 120-odd Taiwan-domiciled equity funds have recorded losses, according to data compiled by Morningstar.
The US$33.3 million PGIM Prudential Financial New Century Fund declined 20 per cent, while the US$51.9 million Yuanta International Trading Equity Fund lost 39.7 per cent, topping the best and worst performers.
02:19
Taiwan holds urban, aerial combat drills amid threats of invasion by mainland China
Taiwan’s market will also have to contend with the Fed’s aggressive rate hikes, which in turn is likely to bolster the strength of the dollar against emerging-market currencies, according to Goldman. Local stocks are among laggards during policy tightening cycles, it said. A US recession will also hurt local companies, given their high sales volume in the US market.
Still, the tensions surrounding Taiwan will continue to escalate and dominate sentiment as the US builds more alliances in Asia, according to Green at TS Lombard. The perception of risk will get higher, he added.
“Cross-strait news and geopolitical events will remain important to monitor when investing in Taiwan equities this year,” So at Goldman said.
