The threat of China invading Taiwan, long considered a highly improbable event, has moved to the center of global money managers’ risk radars and is factoring in their investment decisions, analysts have said.
Fund managers say they are fielding more queries from clients about the odds of an invasion of Taiwan by China. Although none of them has made specific trades related to that risk, their overall exposure to China has reduced for other geopolitical reasons, and Taiwan figures heavily in asset allocation plans.
Taiwan has long been a flashpoint in US-China relations, which have in recent weeks been put under further strain after a suspected Chinese spy balloon was shot down and the US expanded a program in which its troops help train Taiwanese forces.
Russia’s invasion of Ukraine in February last year has also made investors more wary of war risk, analysts said.
“In Europe, since some investors have ... made quite a few losses in Russia, from a risk management point of view, they can’t afford it if something goes wrong in the Taiwan Strait,” said a senior analyst at a US fund house, who declined to be named because of the sensitivity of the topic.
He said many clients have asked how to think about it and it is a risk his firm has been monitoring.
“It hasn’t come to the point where you really need to take any decisive action, such as cut exposure here or there,” he said.
Goldman Sachs’ Cross-Strait Risk Index, which gauges the intensity of geopolitical risk between Taiwan and China, hit a record high in August last year after then-US House of Representatives speaker Nancy Pelosi’s trip to Taiwan. It has since moderated.
“We are at similar levels compared to a year ago, following a spike after the Russian invasion of Ukraine. However, the level is relatively higher than the average in 2021,” Goldman Sachs strategist Alvin So (蘇瑋忠) said.
Spreads on Taiwanese five-year credit default swaps have held at 176 basis points since March last year, nearly 30 basis points higher from where they were at the start of last year.
“The last 12 to 18 months has taught us that we can’t take anything for granted when it comes to geopolitics,” said Will Malcolm, a portfolio manager at Aviva Investors.
“Realistically, if there is ultimately a conflict between China and Taiwan, I think the ramifications are going to be far more severe than necessarily worrying about which company you should be holding in the markets,” Malcolm said. “Even if you parked all your assets in the US, you’d still be very significantly exposed given the profound direct and indirect economic linkages to China and Taiwan.”
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