Investors of Taiwan’s assets may take heart from the latest twist in the presidential race, as a tie-up of opposition candidates raises the odds of a more China-friendly government taking post from 2024.

The benchmark Taiex Index rose Wednesday and the local dollar advanced as traders digested the announcement that opposition parties — the Kuomintang and Taiwan People’s Party — will put forward a united candidate. That came as a relief for some who’ve been worried about a potential deterioration in cross-strait relations should Vice President Lai Ching-te of the ruling Democratic Progressive Party — who has consistently led opinion polls — win.

Geopolitical risks have been an overhang on the island’s equities for years, with investors fretting over the possibility of a military conflict between Taipei and Beijing. While the Taiex index has rallied more than 20% this year as an artificial intelligence boom buoyed chip giants, foreigners are on track for a fourth straight year of outflows.

“It gives us a sense of temporary relief on the election uncertainty,” said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management in Paris. “The alliance raises the potential for further dialogues to improve cross-strait relations.”

Read: Why Taiwan’s 2024 Election Matters From China to US: QuickTake

Voters going to the polls in January will choose between a ruling party determined to maintain Taiwan’s sovereignty, and an opposition that sees closer ties with China as the only viable path. The outcome will define the island’s relations with Beijing in the years to come, while also setting the tone for US-China tensions.

Then US House Speaker Nancy Pelosi’s visit to Taipei in August 2022 raised angst in financial markets as Beijing ratcheted up military drills around the island in a show of warning. The Taiex fell 1.6% in the session before Pelosi met Taiwan’s president but posted small gains on the day.

“Taiwan market volatility tended to rise in the six months leading up to the presidential elections,” Goldman Sachs Group Inc. strategists including Alvin So wrote in a note. “Taiwan equities have shown greater performance in the three months following a KMT victory, while underperforming significantly after a DPP victory.”

While the election remains a key focus, Taiwanese market is also impacted by an array of factors including the US monetary policy, as well as semiconductor and AI cycles.

A potential dovish pivot by the Federal Reserve may drive more inflows into emerging markets, with such expectation on full display Wednesday following a softer-than-expected US inflation report.

The local currency rose the most since July on Wednesday after sliding more than 4% this year, hammered by a large rate differential with the US and equity outflows. The Taiex ended up 1.3%.

Wednesday’s announcement by the opposition “should be broadly positive for Taiwanese and Chinese assets, especially when considered in conjunction with improving US-China relations,” said Rory Green, China economist at TS Lombard. Sectors most exposed to cross-strait trade, including semiconductor companies, agriculture producers and tourism-related firms stand to benefit, he added.

--With assistance from Betty Hou and Iris Ouyang.