War is coming, and soon.
That’s the warning from those with the inside skinny in Washington D.C., Reuters reports.
The risks of China invading Taiwan are “very high,” The risks of China invading Taiwan are “very high,” said Rep. Mike McCaul (R-Texas), chair of the House Foreign Affairs Committee. His comments were based on those of experienced general Mike Minihan. His comments were based on those of experienced general Mike Minihan.
“I hope he’s wrong … I think he is right, though,” McCaul was quoted as saying by Reuters.
If military conflict is inevitable then investors need to prepare. The obvious first choice is to look at the defense stocks such as those held in the iShares U.S. Aerospace & Defense ETF. It’s up 27% over the last two years versus 8% for the S&P 500.
At least part of that gain will have been due to the Russian invasion of Ukraine. However, the continued uptrend also likely reflects increased global concerns over security, with many governments such as the UK and France making moves to up their defense spending.
Investors tend to look forward so in the event of a Chinese invasion much of the defense sector gains will likely already have happened.
However, there is another route investors could take.
The immediate stock market reaction to a war breaking out between China and Taiwan (including the inevitable involvement of the U.S. Japan, UK and France) will be a steep drop in share prices. That should be obvious; wars destroy the economy and, in this case, that’s likely to impact the whole world in some way or another.
The key is understanding how important Taiwan is to the manufacturing world. Taiwan Semi Conductor makes 65% of the word’s semiconductors, also known as chips. But that understates the company’s importance as it also makes 90% of the advanced chips, according to Voice of America reporting.
If the country is invaded you can be sure that at a minimum Taiwan’s semiconductor production will get disrupted. It may even stop altogether for a while.
That will undoubtedly send the price of chips sky high. Remember that oil prices jumped when Russia invaded Ukraine, even though Russia produces a mere 10% of global supply.mere 10% of global supply.
Who is set to benefit from such a grand supply disruption? Obviously, China’s growing chip businesses would see some benefit, but its hard to see them selling their wares to the west amid a war.
Instead, savvy investors should consider Samsung, a major chip producer and a company that is headquartered in South Korea, one of the U.S.’s closest allies.
Like most investment strategies, this one is risky. The war may not happen and so the investment in Samsung might not play out that way. Separately, North Korea might simultaneously invade South Korea while Taiwan is getting attacked.