What’s next for Taiwan?

Taiwan's stock market performed strong in 2023

Despite geopolitical tensions throughout 2023 and tense elections at the start of 2024, the Taiwanese stock market -as measured by the MSCI Taiwan Index- had a splendid year in 2023. Taiwan equities delivered a 31% return, primarily driven by the technology sector (73% of the Index). It was the best performing Asian market last year. Of course, TSMC -the largest chip foundry in the world- delivered a stellar performance and it makes up about 43% of that index. That goes to show you how biased the performance of a particular country index can be when one stock is almost half of its total.

The reason we’re highlighting the recent performance of Taiwan equities is because Taiwan just held its highly anticipated and widely followed presidential elections earlier this month. Given the ongoing geopolitical pressures with regards to the “Tech Island” (as Taiwan is often called), this is an election that could potentially have had worldwide repercussions. However, jumping to the conclusion - spoiler alert! - it appears that, for now, significant changes are unlikely, and the status quo will likely persist for a few more years.

 

DPP's third consecutive win albeit with a parliamentary shift

On January 13, Taiwan elected Democratic Progressive Party (DPP) candidate Lai Ching-te as its next president. This marked the party’s record third win in a row. The president-elect won 40.1% of the votes, compared with 33.5% for the runner-up candidate from Kuomintang (KMT), while Ko Wen-je from the Taiwanese People’s Party (TPP) gathered 26.5% of votes. As a result, the DPP victory will keep the same party in the presidency for 12 consecutive years. This marks the first occurrence of such a scenario since the inception of universal direct presidential elections in Taiwan in 1996.

However, in the parliamentary elections for the Legislative Yuan (the equivalent of the Belgian Parliament), the DPP won only 51 out of a total of 113 seats, losing the majority in the legislature for the first time since 2012. The opposition parties, KMT and TPP, secured 52 and 8 seats respectively, together surpassing the majority threshold of 57. As a result, a divided government will be formed under President-elect Lai's leadership for the first time since 2000, with the executive and legislative branches controlled by different parties. This division will likely make it more challenging for President-elect Lai to enact significant legislation over the next four years.

Lai's victory occurred despite what his ruling party described as China’s most aggressive efforts to interfere in the election, employing tactics like disinformation campaigns and overt military threats. It could even be argued that the election result was a direct consequence of China's interference, suggesting that by doing so, China inadvertently undermined its own objectives.

Only a couple of months ago, on November 15 last year, it still seemed like a more Beijing-friendly alliance between the KMT and TPP was going to be a threat to the ruling DPP. Back then, the opposition parties KMT and TPP agreed to put their two strongest candidates on a joint ticket. This could have dramatically changed the election outcome. But that scenario didn’t play out as tensions quickly surfaced and discussions spiraled in the following days, resulting in a very public disintegration of the alliance on live television. It was your typical political mudfight with politicians bickering in front of reporters and millions of viewers. This resulted in the main opposition party KMT walking out of the meeting for everyone to see, resulting in both opposition parties going into the elections their separate ways. Not exactly the scenario Chinese President Xi Jinping had in mind.

 

Cautious optimism: Taiwan's stance on Cross-Strait relations and US-China dynamics

As speculation of a Chinese invasion of Taiwan has bubbled for years, Xi Jinping has repeatedly made it clear that Taiwan is seen as a breakaway province that will, eventually, be part of China. He also doesn’t rule out the use of force to achieve this and has set 2049 as a target date for “achieving the Chinese dream”.

As most readers will know, Taiwan has long been one of the most contentious issues in US-China relations as well, with China condemning any perceived support from the US for Taiwan independence. In 2022, after a visit to Taiwan by US Speaker Nancy Pelosi, China responded with an unprecedented show of force, carrying out military exercises around Taiwan in retaliation. Under Xi Jinping, China has ramped up this so-called grey zone warfare, sending record numbers of Chinese fighter jets near Taiwan and holding military drills in response to political exchanges between the US and Taiwan. In this respect, it is also important that the US has recently started to reiterate that it does not support Taiwan independence. In fact, US President Biden made that comment to a reporter shortly after the election results were announced. Given that Biden and Xi had recently met in San Francisco in November, it's reasonable to assume that a truce on cross-Strait relations had likely been agreed upon. Following that, it wouldn't be surprising if Biden also conveyed to President-elect Lai the importance of avoiding provocative pro-independence rhetoric after the election victory.

Indeed, President-elect Lai sought to reassure everyone by saying “In the past 8 years, President Tsai had a very steady foreign policy and national defense policy. Her way of doing things has received recognition from the international community. So according to the constitutional order of the Republic of China, I will conduct cross Strait affairs according to that system, so that cross Strait relations can return to a healthy and sustainable way of exchanges.” Lai further stated that as a leader, he has a responsibility to “maintain peace and stability in the Taiwan Strait” and that Taiwan will “continue to walk side by side with democracies from around the world.”

 

Steady as she goes: anticipating Taiwan's stable policies and market focus in 2024

In conclusion, we expect no major changes in economic and Cross-Strait policy under the new administration in Taiwan for the time being. President-elect Lai has already stressed that his approach will be to keep the status quo on foreign policy and national security issues. China has expressed its disappointment at the re-election of the ruling DPP, but other than launching new joint air and sea patrols to continue the military intimidation, the reaction has been relatively muted so far.

Returning to financial markets, given that the election outcome is in fact in line with polls, significant post-election market moves are not what we expect. In fact, with the elections now behind us, one would suppose the market will shift its focus back to company fundamentals in 2024. From that perspective, the AI (Artificial Intelligence) theme has given Taiwans’ ever flexible technology sector another opportunity to reinvent itself in terms of finding new growth drivers. It is estimated that close to two-thirds of Taiwan’s market capitalisation has some exposure to the AI theme, representing the largest share in Asia. Hence, one can only expect that Taiwan will continue to be called the “Tech Island” for quite some time to come.