Reshma Kapadia
Taiwan is a persistent geopolitical hot potato in the U.S.-China relationship -- and its tenuous position looms large for investors who have looked to tap into the artificial intelligence boom.
The exchange between President Donald Trump and Chinese leader Xi Jinping last week about the island democracy Beijing considers its own raised flags in some policy circles but may also have eased some investor concerns about near-term risks surrounding Taiwan Semiconductor Manufacturing Co. and the broader chip sector.
With the fallout from the closure of the Strait of Hormuz still playing out, investors are especially attuned to other potential global chokepoints -- and Taiwan with its chip dominance is a big one, especially as Taiwan Semi makes 90% of advanced chips and the island of 23 million people is home to an ecosystem that touches not just all things AI but much of what has an on and off switch.
When Xi last week warned that if the U.S. mishandled Taiwan it risked jeopardizing the U.S.-China relationship and even conflict, it was a reminder of the risk confronting Taiwan Semi, a top holding in some of the biggest global and international funds.
U.S. officials stressed their policy toward Taiwan -- one of "strategic ambiguity," a longstanding stance that leaves unclear whether the U.S. would defend Taiwan militarily if China attempted to seize it -- was unchanged. The policy is intended to preserve the fragile status quo.
But Trump's remarks in a Fox interview, including his comments that a $14 billion arms package in Congress for Taiwan could be a "negotiating chip," suggested a departure from longstanding policy, says Patricia Kim, senior fellow for the Brookings Institution's John L. Thornton China Center.
"For decades, Washington has maintained that it doesn't consult with Beijing on the size, timing, or contents of arms sales provided to Taiwan for its self-defense," Kim says. "Trump also appears to show greater sympathy for Beijing's narrative that Taiwan's actions are the primary driver of instability in the Strait, rather than China's sustained grey-zone pressure, military coercion, and refusal to engage diplomatically with the current government in Taipei."
But for investors, the shift, if anything, appears to reinforce the view that the risk of a Beijing invasion or blockade of Taiwan in the near-term is limited. Though the stock is down 5% since the summit, the decline coincides with a broader sell off in chip stocks and its shares are still up 30% so far this year.
"You have pretty strong signaling from both leaders that they don't want anything to happen through the end of the Trump term and Taiwan Semi is currently at the heart of the biggest capex boom in the history of mankind," says Arthur Kroeber, head of research at Gavekal. "If you have a three-year time horizon, I think you can be blasé about the risk."
Beyond the remarks, other recent developments have dialed down the risk of an invasion or blockade.
"For me, the most important data point was the purge of the highest levels of China's military a couple months ago," said Arjun Jayaraman, Quantitative Portfolio Manager at Causeway Capital Management. "It doesn't sound like the China military machine is in optimal condition to do an amphibious assault on an island nation."
Tom Hancock, manager of the GMO International Quality ETF, which owns Taiwan Semi, says the stock -- and the Taiwan ecosystem of chip-related companies -- already trades at a discount because of the geopolitical cloud overhead. The summit and remarks, in his view, have done little to change the current status quo.
But investors are keeping tabs on three issues that could lead to a re-evaluation of what they are willing to pay for Taiwanese companies.
The first is the fate of the bipartisan U.S. arms sales package to Taiwan. Though sales could be delayed, Kroeber says if the plug is pulled entirely, it would suggest Trump has traded it for something else, signaling a material withdrawal of U.S. support that would require investors to rethink their political calculations.
The shape of the 2028 presidential race in Taiwan is another factor. Cheng Li-wun, the chair of the opposition Kuomintang, met with Xi in April, the first such visit in a decade.
"Part of what Beijing is hoping for is that the KMT will win and they will have a more pliable government and they can be more relaxed," Kroeber says.
While that outcome could further lower the risk of invasion or blockade, Jayaraman says investors would have to adjust the discount they demand to own TSM and other Taiwanese companies if there are indications a KMT government is willing to bend to Beijing's will.
More than rhetoric, Hancock is monitoring activity on the ground in Taiwan and the extent to which companies diversify their fabs and big projects to other countries, reducing the island's role as a critical chokepoint for the global economy -- and potentially lowering its strategic importance.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 19, 2026 14:17 ET (18:17 GMT)
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