Oct. 1 (Bloomberg) -- Taiwan’s benchmark stock index may rise 33 percent by the first half of next year as consumer companies benefit from closer economic ties with China, said SinoPac Securities Investment Trust Co.

The Taiex Index may reach 10,000 by mid-2010, said Lu Zheng-Ying, manager of the SinoPac Small & Medium Capital Fund, the island’s top performer by total returns over five years. The rally will continue for the next two years, driving the gauge above the February 1990 intraday record of 12,682, 69 percent above yesterday’s close of 7,509.17, he said.

The Taiex surged the most in eight years on April 30 as the island allowed Chinese investment for the first time since the end of a civil war in 1949. President Ma Ying-jeou has sought closer ties with the mainland since taking office last year. The stock gauge added 64 percent in the first nine months of this year, double the MSCI Asia Pacific Index’s 32 percent gain.

“As long as our relations with China continue improving, and China continues to do well, we will reach these targets,” Lu, 33, a mathematics and economics graduate who helps oversee NT$60 billion ($1.9 billion) of funds at SinoPac, said in an interview in Taipei today. Lu has been in charge of the fund for the past two years.

He recommends buying shares that will gain from private consumption growth in China, such as Ruentex Industries Ltd. and Ruentex Development Co.

The Taiex rose 0.5 percent to 7,545.29 at the close of Taipei trading today, the highest since June 27, 2008. Ruentex Industries surged by its 6.9 percent daily limit to a record NT$44.90, while Ruentex Development advanced 3.6 percent to NT$31.95, the most since Sept. 2.

‘Long-Term Investments’

“I will suggest buying these shares and keeping them as long-term investments, which is more than two years,” said Lu, who said he holds some of his shares for as long as five years. “Consumption-related stocks are necessities and won’t fail even if China suffers a bad economy, like luxury shares would.”

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.

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. Taiwan may be playing into China’s goal of using economic clout to end any chance of gaining independence, said Sun Zhe, a senior adviser to the Taiwan Affairs Office, China’s agency for Taiwan policy and go- between with the island in the absence of official ties.

The government in Beijing is prepared to sign a memorandum of understanding on the pact, Wang Yi, head of China’s Taiwan Affairs Office, 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

Lu’s SinoPac fund has outperformed 336 other funds investing in the island’s stocks by returning an average 25.93 percent annually over the last five years, according to data compiled by Bloomberg.

“We saw emerging markets rising, especially China,” said Lu. “We reckoned anything related to China would rise so we bought those shares and kept them. That was our strategy and we expect these China-related shares to still work for us now.”

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

Last Updated: October 1, 2009 02:58 EDT