Since the start of August, the world has been wondering if China will invade Taiwan. While no specific hostile military action has been taken by either nation, China has been rattling its saber. Mainland China recently restarted military drills near Taiwan after its neighbor received a visit from U.S. lawmakers. This delegation included members of the Senate Foreign Relations Committee. The Wall Street Journal reports that those present discussed the maintenance of regional stability and increasing trade relations between the two nations. If tensions do boil over then investors will be considering the best stocks to watch to avoid global conflict-induced turbulence.
And the financial world is definitely nervous about the prospect. Business leaders across the globe are quietly but increasingly preparing for a possible conflict between the two nations. As the Financial Times notes: “The intensified planning by business leaders in the US, Europe, Japan and elsewhere is a signal that investors in China no longer consider an invasion of Taiwan to be merely a low probability ‘black swan’ risk to the world’s second-biggest economy.”
Now, the U.S. foreign policy community is mixed about the prospects of war any time soon. There currently doesn’t seem to be much pressure from China’s domestic audience for war but that could always change.
Most major interstate conflicts are seen as black swan risks, meaning they’re highly unlikely events. But ever since Russia invaded Ukraine earlier this year, the world has had to accept that a similar event is possible in East Asia. That unprecedented conflict has led to significant turbulence in financial markets. Now is the time for investors to protect their portfolios if war breaks out between China and Taiwan too.
Let’s take a look at seven stocks to watch for investors concerned about China and Taiwan tensions boiling over.
|TSM||Taiwan Semiconductor Manufacturing Company||$89.57|
|UMC||United Microelectronics Corporation||$7.13|
|AMD||Advanced Micro Devices||$100.26|
Taiwan Semiconductor Manufacturing Company (TSM)
It’s a safe bet that Taiwan’s leading electronics producers would be hit hard if war broke out. The Taiwan Semiconductor Manufacturing Company (NYSE:TSM) has carved out a lucrative niche for itself as a producer of high-end chips. Many of the U.S. tech sector’s biggest names depend on TSMC’s products. Although Apple (NASDAQ:AAPL) is its biggest client, the company’s long client list includes Advanced Micro Devices (NASDAQ:AMD) and Broadcom (NASDAQ:AVGO). And that concern deservedly puts TSM at the top of this list of stocks to watch if tensions boil over in East Asia.
Investors should note that all companies that buy from TSMC would be negatively affected if Taiwan is attacked. But as a leading Taiwanese company that primarily caters to the U.S., TSMC is a company that China would target. At the very least, it would be forced to suspend operations.
While it is unclear for how long, TSMC should be on every list of stocks to watch if the conflict between China and Taiwan escalates. Mark Liu, the company’s chairman, recently told CNN that an invasion would render TSMC unable to operate. Many companies would suffer under such an invasion but TSMC might be the worst affected.
The largest company by far on this list of stocks to watch is the tech juggernaut Apple. As noted, Apple is heavily dependent on chips produced by TSMC. Their relationship has proven highly profitable for both companies in better times. In April 2022, DigiTimes Asia reported that: “TSMC is estimated to rake in revenues of [$17.024 billion] from fulfilling Apple orders in 2022.” The outlet also noted that represented a significant increase from the previous year. As Apple moves to scale production, it makes sense that its reliance on its chief chip maker would be increasing.
Semiconductors are used in almost every type of consumer electronic device from smartphones to personal computers. Additionally, Apple’s foray into the metaverse promised to increase its need for chips even more. TSMC holds a unique position within Apple’s network as the only company to produce series-A chips for it.
According to Investopedia: “Apple accounts for about one-fifth of TSMC’s annual revenue.” If geopolitical events compromise one, it would be very bad for both companies, rendering Apple unable to fulfill orders. The tech giant would be forced to find another chipmaker. But TSMC’s primary competitor is also based in Taiwan. The growing demand for current and upcoming iPhones has kept AAPL stock a hedge fund favorite. But if its primary chip provider is knocked out of commission, that could quickly change. According to Liu, “the war brings no winners, everybody’s losers.” But TSMC and Apple would likely be the two biggest losers.
United Microelectronics Corporation (UMC)
This smaller chip maker is also based in Taiwan. United Microelectronics (NYSE:UMC) produces semiconductor wafers in metal casting foundry facilities. While it often plays second fiddle to TSMC, that doesn’t mean it won’t be pushed down if China moves to invade or blockade. Small companies often move in solidarity with their larger peers but UMC has actually been outperforming TSMC throughout the month.
That said, everything that applies to the latter likely applies to its smaller peer. If TSMC is indeed rendered unable to operate, as Liu predicts, UMC would likely face the same fate. The smaller company doesn’t have a client list of top U.S. tech companies but it does cater to Texas Instruments (NASDAQ:TXN), a tech producer that also relies heavily on chips. Other clients include Taiwanese firms MediaTek and Realtek which also might be shut down if war breaks out.
Exposure to both U.S. and Asian markets puts the company at significant risk. Jack DeGan, the chief investment officer of Harbor Advisory, recently discussed this with Reuters. As he noted: “Chip stocks are really exposed to Asia. Some of them, especially chip equipment companies, have 70% of their sales in that region so it’s a big deal for them.”A war would likely compromise UMC’s client relationships in both Taiwan and China.
This bill, which will provide subsidies to the U.S. semiconductor manufacturing industry, is seen as good news for chip makers who produce their own chips, but for ‘fabless’ chip companies like Nvidia, which outsource production.
Specifically, Nvidia outsources its chip production to TSMC, like its Silicon Valley peer Apple. “TSMC manufactures the bulk of [Nvidia’s chips], and with TSMC hit by the [potential] Chinese invasion, [NVDA] will also suffer as a consequence,” reports Insider Monkey. In March 2022, Citi analyst Christopher Danely predicted that if China moved to take over Taiwan, investors would gravitate towards companies with low reliance on TSMC. Since Nvidia’s exposure to TSMC is roughly 50%, it makes sense that this type of speculation would push NVDA stock down.
Months later, invasion fears are rising and NVDA stock is not performing well, indicating that this prediction is correct. Clearly, investors should keep this one on their list of stocks to watch for more reasons than just Taiwan.
It’s well known that Tesla (NASDAQ:TSLA) is heavily dependent on China. The country accounts for 34% of the global electric vehicle (EV) market. This means that if anything were to endanger U.S. relations with China, it would be very bad for EV producers. China has already imposed sanctions on Taiwan following the U.S. visit earlier this month. In the event of a war, if the U.S. continues to send aid to the smaller nation, China could retaliate with sanctions against American companies that build in China.
Tesla would likely be among the hardest hit companies. A significant portion of its growing business stems from EV production and sales in China. In June 2022, Tesla’s EV sales in China reached a new record just two months after being shut down. Insider EVs reported that: “Tesla’s cumulative wholesale volume from the Tesla Gigafactory 3 as of the end of June is close to 905,000, including roughly 606,000 in the past 12 months.” The Shanghai gigafactory has become a critical part of Tesla’s empire, helping it reach a 3 million car milestone. If it were rendered unable to build and/or sell in China, TSLA stock would suffer. Additionally, Tesla’s primary battery cell supplier is the Chinese firm Contemporary Amperex Technology Co (CATL). Sanctions against the U.S. could render it unable to export to U.S. clients, causing more production problems.
Texas Instruments (TXN)
Experts flagged this semiconductor and integrated circuit producer as a winner from the CHIPs Act. Unfortunately, Texas Instruments stands to fall significantly if tensions between China and Taiwan escalate. TI already saw revenue fall in April 2022 when China’s government imposed industry-wide shutdowns to curb the spread of Covid-19. Like Tesla, it is a U.S. company that both produces and sells in China. Both operations would likely be compromised if China imposes sanctions against the U.S. It doesn’t help that the company has invested significantly in expanding its China base.
In May 2022, Seeking Alpha reported that “China [has been] the main driver of sales growth for Texas Instruments since the United States, Japan, Asia excl. China and Europe, Middle East and Africa all grew at a significantly lower rate during the past few years.” The author noted that while he saw positioning improve for TI, high exposure to China remained a significant risk. Now it is an even greater one. Any time problems arise in China, TXN is a stock that suffers. Its high exposure to the country and overall reliance on its Asian market operations put it at risk if tensions in East Asia escalated.
Advanced Micro Devices (AMD)
If Nvidia is on a list of stocks to watch, Advanced Micro Devices (NASDAQ:AMD) will usually be there as well. Like Nvidia, this chipmaker grew steadily in late 2021 amid the metaverse boom but has struggled throughout most of 2022. Insider Monkey notes that: “If China invades Taiwan, [AMD’s] manufacturing line could be significantly impacted as tensions between the US and China escalate.” That is certainly true, given that AMD’s exposure to TSMC is 55%, even higher than Nvidia’s. As of the end of 2021, AMD accounted for more than 4% of TSMC’s business, making it the firm’s third largest customer behind Apple and MediaTek.
AMD has a long history with China that helped the company turn itself around in just a few years. However, its partnerships with Chinese military contractors have worried U.S. national security officials. If China and Taiwan were to go to war, AMD would be in a difficult position. Regardless of how any conflict transpires, a stock like AMD with ties to both nations would be pushed down for as long as tensions persist. Both China and the U.S. would likely move to impose sanctions on the other.
AMD, as a U.S.-based company that depends on a Taiwanese company but maintains strong ties to China, would have no good moves to weather the storm.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.