Taiwan's elections and investment implications

Taiwan on Saturday elected William Lai Ching-Te as its next leader, extending the ruling Democratic Progressive Party’s (DPP) 8-year hold on the top job for another four years. The election saw a high turnout of around 70% and the DPP’s support decline in both the leadership and legislature elections. The reduced mandate for the DPP raises the likelihood that policy positions going forward will be more restrained. In our view, this suggests a maintenance of the status quo.

Lai’s 40% share of the vote was lower than his predecessor Tsai Ing-wen’s 57% in the 2020 elections. The DPP also lost its absolute majority in the Legislative Assembly, as its share fell from 54% in 2020 to 45.1%. Both opposition parties raised their share of seats: The Kuomintang (KMT) from 33.6% to 46%, and the Taiwan People’s Party (TPP) from 4.4% to 7.1%. With the electoral outcome now clear, we see several takeaways for investors:

The DPP’s reduced mandate arguably represents a status-quo outcome for cross-strait relations. Post-election media coverage may focus on the implications for cross-strait tensions, but the more fragmented electoral outcome may actually result in a less combative setup. We believe incentives remain strong on all sides to maintain trade and economic relations and minimize the risk of escalation. In his acceptance speech, Lai said he was looking forward to “healthy and orderly” exchanges with mainland China and reiterated his hopes for talks based on more equal terms. Additionally, US President Joe Biden said explicitly, in the immediate wake of the election results, that “we do not support (Taiwan’s) independence,” which seems aimed at soothing tensions in the region. Separately, the more diffuse parliamentary representation could slow legislation, but this will likely have greater implications for domestic policy.

The tech cycle remains the primary driver for both macro conditions and Taiwanese equities. Episodes of elevated geopolitical risk for Taiwan tend have a short half-life in markets—the equity market is typically more tightly correlated with the global tech and semiconductor cycle, which is currently in recovery mode amid sustained growth in AI, cloud, and edge computing demand. In confirming another DPP term, we think markets can now price out the tail risk scenario of a KMT victory undermining tech sector cooperation with the US and its allies.

Volatility in the TWD might rise in the coming weeks, especially in the event of saber-rattling, but this is likely to be transitory. The TWD tends to be seen as the key barometer of investor concerns over geopolitical tensions in the region. In five of the last six elections, the trade-weighted TWD appreciated in the three months prior to the election only to ease after, with no discernible lasting impact. We expect the outlook for the global economy and the AI theme will have a greater bearing on the TWD in the medium term.

As illustrated in our report Global implications of US-China engagement: A bumpy road to a multipolar world, we expect cross-strait relations to remain a constant source of tension in the coming years, especially as the US will likely continue to engage with Taiwan. That said, while investors do need to monitor the situation around Taiwan, we think this status-quo outcome is modestly positive and is unlikely to increase near-term geopolitical risk. We would consider any post-election semiconductor sector selloff as an opportunity to add to long-term exposure. Within our Asia strategy, we are neutral on Taiwan equities.