(Bloomberg) — Taiwan’s collapse from one of the world’s most successful Covid-19 containment stories rattled investors last week. Now, as new daily infections remain elevated and the island extends pandemic-linked restrictions, traders are girding for a full-scale lockdown.
The Taiwan Stock Exchange Weighted Index slumped nearly 9% from its all-time high in April amid concerns over the economic impact of escalating virus cases. Officials on Wednesday extended Level 3 measures like capping social gatherings and closing schools and other venues that were previously limited to the greater Taipei area.
Should the lockdown be raised to a Level 4, additional restrictions on movement and further closure of businesses will result. Key points analysts are now watching for include whether chip-making businesses will be exempted from the strictest containment measures if they are implemented and how many infections emerge within the island’s tech manufacturing hubs.
“With rising confirmed local cases, the index appears to have found near-term support at the 15,000 level, suggesting a further escalation in the pandemic is not priced in yet,” Patrick Chen, a strategist at CLSA, wrote in a note on Tuesday. “The market is now much more reactive to negative news than positive.”
While Taiwan’s government has already said it would aim to keep the world supplied with chips during the outbreak, U.S. officials and executives have voiced concerns about the world’s dependence on chips from the island. Taiwan hosts the highest-end facilities of industry linchpins Taiwan Semiconductor Manufacturing Co. and ASE Technology Holding Co.
Read: Taiwan Extends Soft Lockdown Island-Wide as Covid Cases Rise
Here are the key areas to watch out for over the next few days:
Infections in Hsinchu and Taichung
With Taiwan claiming a large part of the global foundry market share, the prospect of restrictions causing disruptions in the production of chips — already in tight supply — is something analysts are monitoring. Investors should observe the situation in cities where chip factories are densely located, some of them said.
“The Covid-19 infection rates in Hsinchu and Taichung cities, Taiwan’s semiconductor hubs, have so far been contained,” said Ho Woei Chen, an economist at UOB Group. “A pick-up in infection rates in these cities could further hit the global semiconductor supply-chain.”
Exceptions for “essential business” should be made if Taiwan’s case load triggers stricter restrictions, according to a team of analysts at Citigroup including Roland Shu. Semiconductor manufacturing would probably be considered eligible, although companies involved could expect to face additional costs to protect employees, the team wrote in a note published on Wednesday.
Chip companies have tightened controls on staff movement, including not allowing them to travel between different sites. For its part, the government has said it will try to meet global car-chip orders as much as possible.
Containment measures imposed this week will mostly affect businesses deemed non-essential, such as transportation, storage, accommodation and food service companies, according to a team of analysts at Yuanta Investment Consulting including Chen-Hui Yen.
Firms engaged in computers, electronics, optical, chemical, and pharmaceutical products and textiles, as well as plastics and rubber products, are likely to be the least disrupted as they get more than 70% of their demand from abroad, making them less vulnerable to domestic events, the team wrote in a note dated May 17.
Stabilization Fund Intervention
There’s little prospect of the island’s Financial Stabilization Fund intervening in the stock market, KGI’s strategists including Jeff Chang said. Historically the fund was only activated when the Taiex sank by more than 20%, which is unlikely, the team said.
The export-oriented nature of most Taiwanese companies means their earnings will benefit as the global transition to digital services boosts demand as economies re-open, they added.
Downgrades on Uncertainty
Near-term volatility is inevitable given the unpredictable nature of the virus’s spread, analysts said. Citi trimmed its target for Taiwan’s benchmark index to 14,500 from 14,900, suggesting an almost 10% downside from Thursday’s close, while CLSA lowered its view on Taiwan to neutral from overweight.
“The rising number of cases is the immediate cause for profit taking,” said Frank Benzimra, head of Asia equity strategy at Societe Generale HK. “The deeper concern is the valuation at a time when investors re-evaluate the global tech risk premium due to economies re-opening.”