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Foreign Investors Pour Billions into Taiwan and South Korea Stocks Amid AI and Growth Optimism

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Foreign investors have shown renewed confidence in Asian equities for the third consecutive month in July, pouring record-level funds into Taiwan and South Korea, driven by optimism around AI technology and economic growth prospects. Taiwan attracted $7.78 billion—the highest inflow since the 2008 global financial crisis—while South Korea drew $4.52 billion, the largest since February 2024, according to LSEG data.

The MSCI Asia ex-Japan index rose 2% in July, marking its fifth straight month of gains, while Taiwan’s and South Korea’s key benchmarks advanced about 6% each. The two countries, dominant exporters of tech products, have become magnets for AI-related investments amid improving global trade relations and reduced tariff uncertainties.

South Korea’s appeal is boosted by shareholder-friendly reforms, political stability, and solid corporate fundamentals, although recent tax reform concerns have raised some investor caution.

Thailand also saw a return of foreign investment with $499 million inflows in July—the first since September last year—driven by attractive valuations following prolonged selling. However, political uncertainty, macroeconomic challenges, and a strong currency weigh on a more robust recovery, despite a 14% jump in the SET index, its best monthly performance since November 2020.

Meanwhile, Indian markets faced outflows exceeding $2 billion, breaking a three-month buying streak, while Indonesia and the Philippines also saw net withdrawals. Vietnam attracted $326 million as investors favored its strong growth outlook and favorable U.S. tariff terms.

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.