May 10 (Bloomberg) -- Taiwanese stocks have been the world's worst performers under Chen Shui-bian's seven-year presidency as his combative approach to China discouraged investors.

Money manager Chris Ruffle is buying. He says any candidate to replace Chen when his two-term limit expires a year from now will improve relations with China and ease investment restrictions on Taiwanese companies doing business there.

``We don't know who will win, but they can't be worse than the current administration,'' said Ruffle, who manages $3.5 billon in greater China stocks at Martin Currie Investment Management Ltd. in Shanghai. ``Improved domestic politics and China ties will provide a spark for the market.''

In the past two months, Ruffle has bought shares of Bioteque Corp., which provides disposable medical products in China, and Enfield Medical Co., which will start selling cosmetics in China later this year. He also owns shares of Data Systems Consulting Co., a software developer, and Far Eastern Department Stores Ltd., Taiwan's largest department store by market value. All are based in Taipei.

The benchmark Taiex index plunged to its lowest this year on March 5 after Chen called for independence from China. The mainland sees Taiwan as a province and has threatened it with military force to forestall nationhood. The index has rallied 9.6 percent since then to the highest in more than six years as the two major parties have selected their presidential candidates for the March 2008 election.

World's Worst

Shares on Taiwan's benchmark are valued at an average 17.3 times current earnings, more than a third cheaper than the 27.8 times over the past five years, according to Bloomberg data.

The Taiex index has fallen 18.5 percent in U.S. dollar terms since Chen became president on May 20, 2000, the most among 90 major indexes tracked by Bloomberg. Chen took office amid a global sell-off in technology shares, which make up 57 percent of Taiwan's index, more than any other benchmark. The Morgan Stanley Capital International Asia-Pacific index is up 32 percent since then.

``The pursuit of Taiwan's independence is not a dangerous regression but the noblest undertaking,'' state-run Central News Agency quoted Chen as saying on March 4.

Hon Hai Precision Industry Co., which makes iPod devices for Apple Inc. in China, is the biggest contributor to the index's gain since May 5, followed by Hsinchu-based MediaTek Inc., which supplies chips to Chinese mobile phone makers.

`Political Bickering'

Taiwan split with China in 1949 when Chiang Kai-shek's Kuomintang, or KMT, government fled there after losing a civil war in China to Mao Zedong's communists. More than 900 Chinese missiles are aimed at the island, according to Chen.

Chen's ruling Democratic Progressive Party, which ended KMT's five-decade rule in Taiwan in 2000, has a platform supporting independence. The opposition KMT, which was defeated by Chen again in 2004, says it wants closer ties with China to boost Taiwan's economy. The KMT is the biggest party in parliament and has held up this year's budget.

``Investor confidence has been torn by years of political bickering,'' said Yu Reming, who helps manages $985 million at Entrust Investment Trust Corp. in Taipei. ``Investors have preferred to invest elsewhere.''

Taiwan residents remitted a record $44.1 billion for investments in overseas equities in 2006, according to the island's central bank, more than twice the $21.8 billion foreigners invested in Taiwan last year. Foreign investors' purchases of the island's shares this year have slumped 63 percent from a year earlier, according to Bloomberg data.

Candidates

Ma Ying-jeou, the opposition KMT's candidate for next year's election, has said he would negotiate a peace accord with the mainland and pledged to ease restrictions on companies investing in China. Chen's government has capped the island's companies' China investments to a maximum of 40 percent of their net worth.

Former Taipei mayor Ma quit as chairman of KMT after being indicted on Feb. 13 for allegedly misusing NT$11.2 million ($339,000) of city funds. He has denied any wrongdoing.

Ma faces the ruling party's Frank Hsieh, Chen's fourth premier since 2000, who was nominated May 7. Hsieh, while serving as premier in 2005, lifted a ban on Taiwan-based airlines using China's airspace and allowed a ship to carry passengers to China from the Penghu archipelago, a cluster of island in the Taiwan Strait. In May 2005, Hsieh said he welcomed China's proposal to relax restrictions for tourists traveling to the island.

`Pragmatic Stance'

``The election will force candidates to adopt a more popular and pragmatic stance'' toward China, said Andrew Yang, a Kaohsiung-based political analyst.

China is Taiwanese corporations' largest investment destination. Of the $100 billion cross-strait trade in 2006, $80 billion were Taiwanese exports to China.

The Taiwan Stock Exchange plans to merge with the island's smaller bourse and futures market in an attempt to stem an outflow of companies, Chairman Gordon Chen said. Chen is trying to halt the loss of companies to exchanges such as Hong Kong's, which don't have the same restrictions on investments in China.

William Fong, who helps manage $7 billion as Asian equities investment manager at Baring Asset Management in Hong Kong, isn't convinced now is the time to bet on political developments.

``Uncertainty over the presidential election outcome, coupled by a lukewarm domestic consumer sentiment, mean Taiwan stocks are not ready to catch up,'' Fong said.

Pushing the Government

Taiwan Semiconductor Manufacturing Co., which has a plant in Shanghai, and other Taiwanese companies are pushing the island's government to lift curbs on their investments in China, where labor costs are cheaper and overseas rivals are expanding.

Hsinchu-based Taiwan Semiconductor got government permission in March to upgrade its production in China, the same month Intel Corp., the world's largest chipmaker, announced $2.5 billion investment plans to build its first semiconductor plant there.

``With technology companies confirming strong revenue and a PC replacement cycle coming up next year, Taiwan does have some value,'' said Sophia Cheng, head of research at Merrill Lynch & Co. in Taipei. Merrill's picks in Taiwan include Acer Inc., the world's third-largest computer supplier, and Hon Hai Precision.

Sakthi Siva, a Singapore-based strategist at UBS AG, named Hon Hai, Taiwan's biggest electronics exporter, and AU Optronics Corp., the world's third-largest maker of liquid-crystal displays, among her top picks in Taiwan, citing their earnings growth.

``With the election coming up and potential for change on the positive side, why continue to sell?'' she said.

To contact the reporter for this story: George Hsu in Taipei at georgehsu@bloomberg.net

Last Updated: May 9, 2007 12:21 EDT