Sept. 23 (Bloomberg) -- Taiwan stocks may jump more than 34 percent next year on stronger ties with China and expectations technology companies will benefit from increased demand in Europe, the manager of the island’s best-performing fund said.

The Taiex benchmark stock index may exceed 10,000 in 2010, said Robyn Hsu, who helps manage $3 billion at Capital Investment Trust Corp., including Capital OTC Fund. The gauge retreated 0.5 percent to 7,469.03 yesterday, and dropped 1.2 percent to 7,376.76 at the close in Taipei today.

“People were excited to buy Taiwan shares even when it used to be just talk and no action” with China ties, Hsu said in an interview in Taipei yesterday. “Now that the financial memorandum of understanding is going to be signed, it’s just the beginning of real gains. I expect shares to keep rising.”

Taiwan, currently in a recession, is seeking a so-called economic cooperation framework agreement with China to allow cross-shareholdings of banks and insurers that is estimated to create 273,000 jobs and boost exports. The Chinese government wants to use economic ties to quell any moves toward independence on an island it considers part of its territory.

The government in Beijing is prepared to sign a memorandum of understanding on the pact, Wang Yi, head of China’s Taiwan Affairs Office -- the nation’s go-between with the island in the absence of official ties -- said in a speech on Sept. 21. It’s also willing to proceed with a trade accord “once both sides are ready,” he added.

Closer Ties

Taiwan has been governed independently since China’s nationalist Kuomintang fled to the island after losing a civil war to Mao Zedong’s communists in 1949. President Ma Ying-jeou has sought closer ties with the mainland, abandoning his predecessor’s pro-independence stance, since taking office last year. The two markets resumed direct flights, shipping and postal services on Dec. 15, ending a six-decade ban.

Ma faced a setback earlier this month when he sacrificed his premier Liu Chao-shiuan in a surprise ouster designed to contain anger at the government’s mishandling of a typhoon in August that killed more than 600 people and caused NT$110 billion ($3.4 billion) of damage.

The president’s popularity fell to a record low after Typhoon Morakot, which struck Aug. 6 to 9, killed more than 600 people and sparked criticism for his administration’s handling of recovery efforts. Fulfilling election promises to strengthen ties with China had helped Ma’s approval climb and the stock market soar.

‘Long-Term Benefit’

The Taiex surged the most in eight years on April 30 after the island allowed Chinese investments for the first time since the civil war. It has added 61 percent this year, compared with the MSCI Asia Pacific index’s 33 percent gain.

“The China topic is going to have a very long-term benefit to Taiwan shares,” said Hsu, a 37-year-old who described himself as a fan of “China-flavored songs” from local pop singer Jay Chou.

Hsu’s Capital OTC Fund, which outperformed 319 other funds investing in the island’s stocks, posted a 99 percent return this year.

Technology stocks “will be the highlight for 2010,” said Hsu, whose funds own shares of Acer Inc., the world’s No. 3 computer manufacturer, and Taiwan Semiconductor Manufacturing Co., the largest custom-chip maker, according to data compiled by Bloomberg. He declined to say which stocks he will add.

Taiwan Semiconductor, Acer

Europe’s economy probably returned to growth in the current quarter after governments spent billions of euros to pull the region out of the worst recession in more than six decades, the European Union said Sept. 14.

Taiwan Semiconductor derived as much as 12 percent of its revenue from Europe in 2008, while the region accounted for 42 percent of Acer’s sales last year, data compiled by Bloomberg showed. About 10.9 percent of Taiwan’s total exports in the first eight months of this year were shipped to Europe, according to data from Taiwan’s Ministry of Finance.

“More than half the Taiwan index is made up of tech stocks and they will benefit from a recovery in Europe,” said Hsu, who became a fund manager four years ago after working on research and development in the chemicals industry.

To contact the reporter on this story: Weiyi Lim in Taipei at Wlim26@bloomberg.net

Last Updated: September 23, 2009 02:12 EDT