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Investors Brace for China-Taiwan Conflict Risks, But See No Safe Hedge

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Foreign investors are increasingly forced to factor in the once-unthinkable: the possibility of China invading Taiwan, a scenario made more plausible amid rising U.S.-China tensions under President Donald Trump and a new wave of global trade nationalism. Yet, despite heightened geopolitical anxiety, investors see little to no viable strategy for hedging against a full-scale conflict over the democratically governed island.

“You can’t settle any trades, the currency might disappear altogether… you either carry on like it’s business as usual, or stay away,” said Mukesh Dave, CIO of Aravali Asset Management.

War or Status Quo: A Binary Outlook

Investors now view the China-Taiwan standoff as a binary risk:

  • War, which would likely obliterate Taiwan’s status as a stable investment market.

  • Peace, maintaining the status quo under continued diplomatic ambiguity.

Rising Odds and Market Reaction

  • The Polymarket platform now pegs the odds of an invasion at 12%, up from near zero earlier in the year.

  • Taiwan stock outflows totalled nearly $11 billion in 2024, fueled in part by U.S. tariffs.

  • Taiwan’s benchmark index (.TWII) is down 6% year-to-date.

Even Goldman Sachs’ Cross-Strait Risk Index, which tracks media references to tensions, has been steadily climbing since Trump’s election win in late 2024.

“If aggression occurs, the investment decision becomes binary: stay exposed and absorb extreme volatility, or exit swiftly to preserve capital,” said Steve Lawrence, CIO of Balfour Capital Group.

TSMC at the Heart of the Dilemma

The central pillar of Taiwan’s market remains Taiwan Semiconductor Manufacturing Co (TSMC):

  • Valued as the crown jewel of the global chip industry

  • Supplies giants like Apple and Nvidia

  • Has been both a market driver and a geopolitical flashpoint, especially as Trump’s tariff policies increasingly target advanced tech

“TSMC is so big that the expectation is the U.S. will defend Taiwan — and defend it strongly,” said Dave.

However, Trump’s inconsistent tariff maneuvers, including temporary delays for negotiation leverage, have spooked investors and underscored Taiwan’s exposure to external political will.

Diverging Views on Risk

While global investors appear increasingly concerned about cross-strait instability, some local voices remain sceptical:

“We shouldn’t interpret this from a geopolitical risk perspective. The key issue is the tariffs,” said Li Fang-kuo, chairman of Uni-President’s securities advisory unit in Taiwan.

Others, like Rich Nuzum, global strategist at Mercer, recommend broad diversification and crisis stress-testing as the only realistic tools for institutional clients.

“There is no hedge for war,” Dave noted plainly. “But there is stress-testing for fear.”

With Taiwanese President Lai Ching-te pledging peace and Beijing accusing him of separatism, tensions remain unresolved. Investors face a stark choice: stay exposed to Taiwan’s tech-driven growth, or exit amid escalating uncertainty.

US Missile System Remains in Philippines Amid Rising China Tensions

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The United States has decided to maintain its mid-range Typhon missile system in the Philippines, despite protests from China. The missile system, capable of launching cruise missiles with a range exceeding 1,600 km, was initially deployed earlier this year for joint military exercises between the U.S. and the Philippines. While the exercises have concluded, U.S. officials, in coordination with the Philippine military, continue to test the system’s feasibility for future conflict scenarios, particularly in the Indo-Pacific region.

The Typhon missile system remains stationed in the northern Luzon region, strategically located near the South China Sea and the Taiwan Strait. This area has been the scene of increasing confrontations between China and the Philippines over disputed maritime territories. U.S. and Filipino forces have continued training with the missile system, and there are no immediate plans to remove it, according to multiple sources familiar with the matter.

The deployment has stirred tensions with China and Russia, with both countries condemning the move as an escalation of military tensions in the region. China has accused the U.S. and the Philippines of fueling an arms race, while Russia has referenced the deployment as justification for resuming production of nuclear-capable missiles. Despite these criticisms, Philippine officials, including Foreign Affairs Secretary Enrique Manalo, have assured China that the missile system does not pose a threat to regional stability.

Strategically, the U.S. sees the Philippines as a crucial partner in the Indo-Pacific, particularly in the event of a Chinese attack on Taiwan. The missile system, which is modular and mobile, provides a significant defensive capability that could be swiftly deployed if necessary. For Manila, the presence of the Typhon missile system serves as a deterrent to Chinese aggression in the South China Sea, where Beijing has fully militarized several islands despite a 2016 international ruling favoring the Philippines.

This move comes as part of the U.S. military’s broader efforts to increase its anti-ship capabilities in the region. The U.S. plans to acquire more than 800 SM-6 missiles in the coming years, and thousands of Tomahawks are already in its arsenal. With China maintaining a significant missile lead in the region, the U.S. is working to close the gap through deployments like the Typhon system in the Philippines, a development likely to keep tensions high in the Indo-Pacific.