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As much as people in China revere Warren Buffett, the national stock market has historically drawn more comparisons to a casino. Sentiment-driven retail investors have generally dominated the local market. In decades past, China was also growing so fast that a company, and an investor, apparently only had to participate to benefit. And just about three years ago, value investors in China were wringing their hands because the growth strategy was working so much better, according to Claire Liang, a senior managing research analyst at Morningstar. But that’s since it started to change. A regulatory crackdown and a sluggish economy have depressed confidence. “Concerns about China’s economic growth and geopolitics in the last year or so have also led to a [preference] for Chinese companies that can generate stable cash flows,” Liang said. “Many of the portfolio managers we spoke to continue to believe there are opportunities they can find through bottom-up stock picking,” he added. This year, only three of the 29 funds Morningstar tracks have overcome the 5.5% drop in the MSCI China Index at the end of June: BOCIP China Value A Fidelity China Focus A Dist USD Ninety One GSF All China Eq A Acc HKD Los The first two have a value-style slant, outperforming not only the MSCI China Index in the first half of this year, but in all of 2022, according to Morningstar. But for many funds, short-term outperformance doesn’t necessarily mean a profit Rather, it is adhering to one of Benjamin Graham’s axioms: avoid loss.While Chinese value and growth funds have generally posted losses over the three years ending July 2023, growth has lagged 12% annually Liang said. he was quick to point out that it’s not enough to focus on a single investing style, such as value versus growth. In terms of Morningstar’s fund ratings, based on factors the firm calls people, processes and matrices, Schroder’s ISF China Opps and FSSA China Growth are rated gold for strong performance in the “people” and “process” categories. . Watching valuations closely helped the Schroders China portfolio manager make some timely gains in “some overheated information technology stocks,” Liang said. “We believe their valuation discipline has helped the fund to better navigate the market in 2021 and 2023.” Several large Chinese companies have started reporting quarterly earnings in the past two weeks. Their results reflect which parts of the economy have been growing faster than others. In early August, Goldman Sachs analysts said their approach to investing in Asia has been to pick stocks based on earnings revisions. It has been “the leading style/factor strategy in Asia over the long term and [year-to-date] as the earnings downgrade cycle began to slow,” Timothy Moe and a team said in the report. “We expect the market to continue to reward companies that exhibit this.” 2024 growth expectations, reasonable valuations, and earnings revisions stable: Poly Developments, a state-owned real estate developer that sold the most real estate by value in the first seven months of the year, up 10% from the same period a year earlier, according to data released by the E-Research Institute. House Fuyao Glass: an automotive glass manufacturer whose American company was featured in the Netflix documentary “American Factory” Suzhou Maxwell Technologies: a producer of solar cell manufacturing equipment.
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