Investors might take heart from the latest twist in the presidential race, as a tie-up of opposition candidates raises the odds of a more China-friendly government taking post next year.
The benchmark TAIEX rose on Wednesday and the New Taiwan dollar advanced, as traders digested the announcement that the Chinese Nationalist Party (KMT) and the Taiwan People’s Party (TPP) would put forward a united candidate. That came as a relief for some who have been worried about a potential deterioration in cross-strait relations should Vice President William Lai (賴清德), the Democratic Progressive Party’s (DPP) presidential candidate, who has consistently led opinion polls, win.
Geopolitical risks have been an overhang over Taiwanese equities for years, with investors fretting over the possibility of a military conflict between Taipei and Beijing. While the TAIEX has rallied more than 20 percent this year as an artificial intelligence (AI) boom buoyed chip giants, foreigners are on track for a fourth straight year of outflows.
“It gives us a sense of temporary relief on the election uncertainty,” said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management in Paris. “The alliance raises the potential for further dialogues to improve cross-strait relations.”
Voters going to the polls on Jan. 13 are to choose between a ruling party determined to maintain Taiwan’s sovereignty, and an opposition that sees closer ties with China as the only viable path. The outcome would define Taipei’s relations with Beijing in the years to come, while also setting the tone for US-China tensions.
Then-US House of Representatives speaker Nancy Pelosi’s visit to Taipei in August last year raised angst in financial markets, as Beijing ratcheted up military drills around Taiwan in a show of warning. The TAIEX fell 1.6 percent in the session before Pelosi met President Tsai Ing-wen (蔡英文), but posted small gains on the day.
“Taiwan market volatility tended to rise in the six months leading up to the presidential elections,” Goldman Sachs Group Inc strategists including Alvin So (蘇瑋忠) wrote in a note. “Taiwan equities have shown greater performance in the three months following a KMT victory, while underperforming significantly after a DPP victory.”
While the election remains a key focus, the Taiwanese market is also affected by an array of factors, including the US monetary policy, as well as semiconductor and AI cycles.
A potential dovish pivot by the US Federal Reserve might drive more inflows into emerging markets, with such expectation on full display on Wednesday following a softer-than-expected US inflation report.
The local currency on Wednesday rose the most since July after sliding more than 4 percent this year, hammered by a large rate differential with the US and equity outflows. The TAIEX closed up 1.3 percent.
Wednesday’s announcement by the opposition “should be broadly positive for Taiwanese and Chinese assets, especially when considered in conjunction with improving US-China relations,” said Rory Green, China economist at TS Lombard.
Sectors most exposed to cross-strait trade, including semiconductor companies, agriculture producers and tourism-related firms stand to benefit, he added.
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