During the first week of August we saw China get nervous when one of the top US government officials visited Taiwan earlier this month. To further heat up the atmosphere, the news that a group of US legislators will meet has only fueled the flames of this conflict. China's threat to take control of the region by force if necessary endangers the world's largest chip-making economy and, by extension, our stock investment.
What exactly is going on?
Taiwan may be ranked as the 18th largest economy in the world, but it is far above its economic position when it comes to semiconductors. This small country manufactures 65% of the world's computer chips, while China and the United States (two of the largest consumers of semiconductors) have a combined market share of 15%. Taiwanese chipmaker TSMC alone makes more than three times as many.
Semiconductor market share by country.
Right now, the world is overly reliant on Taiwan to fulfill most of its orders. And although China, the US and Europe have already promised to invest more than $250.000 billion between them to expand their chip-making capacity, these new projects probably won't produce any chips before 2026. As for the US's desire... For the U.S. to achieve “complete self-sufficiency” in terms of manufacturing, it will likely take at least 10 years and more than $XNUMX trillion in investment, according to Boston Consulting Group and the Semiconductor Industry Association.
What impact does a Chinese invasion of Taiwan have?
1. Delays and chip shortages.⏳
If China eventually attacks Taiwan, one of the main risks is a new global chip shortage. Although they usually represent a small percentage of total material costs, they are also irreplaceable. This means that a chip shortage can stop production entirely. During the time of Covid confinements we lived it. For example, Apple It had to delay the launch of new products and cut production targets, which had a negative impact on its sales growth. And with Bloomberg estimating that Apple accounts for about 25% of TSMC's profits, this is an example of what could happen on a much larger scale in the future for all sectors of stock investing.
The value of investing in TSMC stock depends largely on Apple. Source: TSMC.
2. It would boost global inflation.
In the graph below you can see the effect of the shortage caused by the pandemic on chip-dependent industries in the US, which represent close to 40% of the country's manufacturing sector. Stock investment prices in chip-dependent industries rose an average of 4% more (in red) than stock investment prices in non-chip-dependent industries (in blue).
Price variation in US manufacturing industries. Source: BEA/BLS
3. Global economic growth would be affected.
China contributes one-fifth of the world's economic output, meaning a military conflict would have major consequences for investing in Chinese stocks. Not to mention that a disruption in Taiwan's chip production would cause production stoppages around the world and ultimately hurt stock investment around the world. After all, TSMC makes chips for other chip manufacturers and designers, such as Broadcom, Qualcomm, Nvidia, AMD y Texas Instruments. And since they supply the world's largest manufacturers of consumer electronics, communications equipment and auto parts, this would have serious knock-on effects.
So how do we protect our stock investment?
Military conflicts have historically been associated with drops of between 10 and 20% in investment in a country's stocks, and have been especially detrimental to investment in emerging market stocks. It has also been associated with risks such as rising inflation and possible recessions. Since we know this, we recommend that you make our investment in shares with a low beta, Treasury inflation-protected bonds (TIPS) and in alternative investments.
Are there any interesting ETFs to invest in?
Fortunately for you, the answer is yes. You can diversify your investment in stocks with ETFs from the aerospace and defense sectors. The most optimal for the mix would be the ETF iShares US Aerospace & Defense (NYSE:ITA), the ETF Invesco Aerospace & Defense (NYSEARCA:PPA) and the ETF SPDR S&P Aerospace & Defense (NYSEARCA:XAR).
And since wars are becoming fashionable, cybersecurity ETFS like the SPDR S&P Kensho Future Security ETF (NYSEARCA:FITE) could also be a good bet to diversify our investment in stocks.
What if I don't want to invest in ETFs?
If you feel like taking a little more risk and don't want to invest in ETFs, you can make your investment in shares of chip production companies based in the US and Europe, such as ASML (NASDAQ:ASML), Global Foundries (NASDAQ:GFS), Tower Semiconductor (NASDAQ:TSEM), or the South Korean Samsung Electronics (KRX:005930). All of them would benefit from possible logistics problems and a price increase in the event of a interruption, as the world's manufacturers would turn to them to compensate for the absence of Taiwan.