The pro-democracy Umbrella Movement in Hong Kong that calls for the universal suffrage right has sounded alarm bells in Taiwan, a flourishing democracy and an attractive investment destination for numerous emerging market investors.

Taiwan, which takes up a significant portion of emerging markets indices, and China have shared a tense and uneasy relationship over the past 65 years. China has never recognized Taiwan as an independent nation and Taiwan has always refused China’s proposal that it be governed by the Mainland as part of the “one country, two systems” regime that exists for Hong Kong.  

In the current context, some investors fear China could become more aggressive than it has been toward Taiwan, thereby threatening its sovereignty.

“We’re in a wait and see mode with respect to Taiwan but what’s happening there and in Hong Kong is making investors nervous,” said Peter Kohli, CEO of DMS Funds. “While the possibility of Chinese aggression has always been an underlying theme when it comes to Taiwan, there is a genuine concern that China is reneging on its democratic agreements with Hong Kong, and this has impacted investments in the region, so the entire picture is not very pleasant.”

How do investors view Taiwan and its relationship with China?

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1: A Strong and Solid Economy

Taiwan has always been a default investment destination of sorts and though it does represent a large part of the emerging markets index, “we regard it more as a developed than an emerging market, because it is a stable economy with a stable currency, a high savings rate and high per capita GDP,” said Nick Smithie, chief investment strategist at Emerging Global Advisors.

That means that the rationale for investing in Taiwan is different than it is for other emerging markets with lower per capita GDP rates that investors believe will rise over time, and that are in the early stages of the market economy cycle, he said. Taiwan represents all the best elements of democracy and capitalism, said Kohli, “and it’s a good, safe play for investors. Taiwan’s export-based economy has also enabled the nation to amass the world’s fourth-largest stash of foreign exchange reserves.

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2: A Profitable Tech Play  

“People do not really invest in Taiwan with the idea of long term growth potential: They invest there more as a tech play, because Taiwan’s forte is its technology sector,” Smithie said. “Taiwan has a very mature technology sector comprising some of the world’s foremost tech companies, such as Taiwan Semiconductor and Mediatek. So investors like to play the tech cycle through Taiwanese technology companies and that has been a good strategy this year, since tech earnings have risen and the Taiwanese market has been a good performer because of that.” Taiwanese tech companies produce both intermediate well as final products, all of a very high caliber, Kohli said.

Otherwise, the Taiwanese market consists of banks, insurance companies and other finance companies, which tend to be slow growers and not particularly profitable, “but they do produce good dividends, so investors go for that as well as the tech cycle,” Smithie said.

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3: Politics as Usual?

Smithie believes there is reason to be concerned about the current Hong Kong/China, Taiwain/China tensions. After all, the relationship between Taiwan and China has ebbed and flowed for the past 65 years, he said, veering between periods of détente and moments of tension.

“This time, too, there’s no reason to believe that things would move in any different way,” Smithie said. “It would be a real global faux pas on China’s part to interfere with Taiwan, so there is no reason for the markets to panic about Taiwan. As it were, there are many links between Taiwan and China – tourism, notably, Smithie said, and manufacturing a large number for Taiwanese companies actually takes place in Mainland China.

Jeopardizing these ties by rattling the status quo wouldn’t benefit either China or Taiwan, “which is why I don’t see any major change occurring now, even though China is looking to extend its influence throughout Asia, and has clashed with The Philippines, Vietnam and Japan as it has claimed more territory in the South China Sea.,” he said.

That being said, though, it should be noted that some South Korean companies that had always chosen Taiwan as a manufacturing base are now opting to build their factories in Vietnam instead, Kohli said. While that could be a function of Vietnam’s labor costs as opposed to the current political tensions, this dynamic could impact Taiwan should it intensify.