(Bloomberg) -- Investors are keenly looking to Taiwan’s upcoming elections for clues on the path forward for cross-strait relations. The outcome of the vote is expected to have implications on the global computer chip supply chain and foreign flows to the island’s tech-heavy market.

A win for the incumbent Democratic Progressive Party at the Jan. 13 poll will likely keep things status-quo, while a narrower lead — or surprise win by more China-friendly opposition groups — may boost hopes for better collaboration with Beijing and be a boon for Taiwanese stocks.

The market has already priced in a base case scenario of a DPP win, but “a closer gap between DPP and Kuomintang may be seen as a slight positive,” as it reduces the risk of conflict with China, said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management. 

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The stakes are high for Taiwan, whose stock benchmark is trading near an all-time high amid an artificial intelligence boom and a turnaround in the chip cycle. On the one hand, improving cross-strait ties may help boost sentiment in Taiwanese assets. On the other, a closer relationship with China will likely put the island’s key semiconductor industry under US scrutiny.

Whichever party wins, Taiwan tech companies will need to “navigate carefully and nimbly between the two superpowers for the sake of their markets and technologies,” Bao said, referring to China and the US.

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Here are areas investors should watch around the election:

Chip Leader

The semiconductor sector remains at the center of global geopolitics and how the new administration forges ties with the US will be crucial in ensuring access to chip-making equipment from Western providers such as ASML Holding NV.

Taiwan produces around 90% of the world’s most-advanced chips. A best-case DPP administration will continue to secure Taiwan’s status as an “independent location to fabricate chips and assemble AI servers,” while a KMT victory may see firms attempting to diversify their supply chain away from the island, according to Dylan Patel, founder of the research group SemiAnalysis. 

Its largest manufacturer, Taiwan Semiconductor Manufacturing Co., which makes up more than 27% weighting in the Taiex Index, will be on investors’ radar. Tech stocks, including Wiwynn Corp., Wistron Corp., Quanta Computer Inc. and Asustek Computer Inc., will also be supported by an array of other factors such as potential interest-rate cuts by the Federal Reserve and a recovery in the smartphone and personal computer market.

READ: Why Making Computer Chips Has Become a New Arms Race: QuickTake

Energy Stocks

The island’s energy policy is among key focuses for the presidential candidates, with the ruling party having pledged to phase out nuclear power by 2025. Meanwhile, the opposition is advocating postponing the deactivation of nuclear plants, preferring a more gradual shift to renewables.

“If the ruling DPP wins another term, it will most likely stick to its current energy policy,” which aims to have over 15% of Taiwan’s energy sources from renewables by 2025, said Newda Chen, an analyst at Masterlink Securities Investment Advisory. The wind power companies that benefited from such policy will be able to sustain their favorable conditions and positive outlook, he said.

On the other hand, KMT’s target for nuclear power to account for 12% of Taiwan’s energy mix by 2030 “could lead to slowing of development and growth drivers for the wind power companies,” said Chen.

Firms that produce materials for wind turbines include Century Iron & Steel Industrial Co. and Yeong Guan Energy Technology Group Co.

Tourism Plays

The KMT’s presidential candidate has vowed to “immediately open the door” to mainland tourists. That will provide a tailwind for Taiwan’s tourism sector, according to Edward Chen, chairman of First Capital Management. 

China has barred individual tourists from coming to Taiwan, while cross-strait group tours were suspended since the pandemic. Taiwan will allow group tours to restart on March 1.

Key stocks to watch include China Airlines Ltd., Eva Airways Corp., Phoenix Tours International Inc., Lion Travel Service Co. and Ezfly International Travel Agent Co.

Defense Names

All three presidential candidates — DPP’s Lai Ching-te, KMT’s Hou Yu-ih and Ko Wen-je of Taiwan People’s Party — have pledged to bolster Taiwan’s military capabilities by increasing defense spending. 

That bodes well for the overall outlook of major defense stocks such as Taiwan’s leading fighter jet-maker Aerospace Industrial Development Corp., which rallied about 50% last year. Shipbuilders, including CSBC Corp. and Lungteh Shipbuilding Co., may also get a boost if the DPP wins, following the party’s push for domestically-produced submarines.

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