Nov. 3 (Bloomberg) -- Taiwan’s stocks will offer one of the best returns in Asia next year as corporate earnings improve with warming cross-straits relations with China, according to Allianz SE.

The economic cooperation agreement with the mainland will allow Taiwan’s companies to expand beyond their home market, boosting the outlook for profits, said Nikhil Srinivasan, who oversees about $25 billion as Singapore-based chief investment officer for Asia and Middle East at Europe’s biggest insurer.

“Taiwan is a buy story as the economic and commercial assumptions from cross-strait ties are positive for the market,” he said in a phone interview today. “Asian markets will rely on company earnings beating expectations in 2010 as good year-on-year economic data in the first half of 2010 is mainly discounted.”

The island’s stock exchange is set to attract its biggest annual fund inflows in three years as net purchases of stocks by global investors reached $11.3 billion through October, according to data from the Taiwan bourse. The benchmark Taiex Index has gained 60 percent this year to 7,322.93, heading for its biggest rally since 1993.

China Airlines and EVA Airways Corp., Taiwan’s two largest carriers, last week posted third-quarter losses that narrowed after the carriers added flights to the mainland, offsetting a global slump in international passenger and air-cargo demand.

Exports

The island’s exports fell at the slowest pace in 11 months in September on improved demand for telephones, computers and electronic goods from China. Shipments to the mainland, Taiwan’s biggest overseas market, rose 2.1 percent from a year earlier, the ministry said last month.

Taiwan and China will begin talks on a trade agreement in December as the island seeks to revive its economy and the government in Beijing aims for extra leverage over its counterpart in Taipei. President Ma Ying-jeou took office in May 2008 by abandoning his predecessor’s pro-independence stance and eased curbs on investments and direct transport links with China.

The accord will be discussed at cross-strait negotiations on cooperation in the fishing industry, certification of agricultural and industrial goods and double taxation, Ma Shao- chang, deputy secretary-general of Taiwan’s Straits Exchange Foundation, said in an interview today.

“Once the agreement is signed, there’s going to be a re- rating on Taiwanese stocks in terms of price-earnings multiple over the next 12 months,” Srinivasan said. “The Taiex at below 7,000 is a buy. I would buy the index as a market call.”

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net

Last Updated: November 3, 2009 02:53 EST