“Holding value stocks for the long term when sentiment is low will give investors very high returns in the Chinese stock market.” I could stop the summary there. That’s all casual readers need to know.
The authors of the paper from which this nugget is extracted, Zhaohui Jiang (et al.), drilled the Shenzhen and Shanghai stock markets from January 2000 to December 2021 and obtained this wisdom which is more profound than it may at first appear.
First, the finding is at odds with studies of more developed stock markets where ‘growth’ stocks are the more regularly feted celebrities. China’s markets, dominated still as they are by non-institutional types, have several unique quirks of which this value bias is one.
Second, China’s markets, at least in the observed range, tend to be characterized by short bull and long bear markets (the researchers believe an absence of short selling tools may be responsible). This is important if you’re waiting for a momentum signal which may come too late in China to be of much value.
Finally, (poor) sentiment is a good guide to the times you should act. With the only problem, for the researchers at least, being how to define ‘sentiment’? This last observation should be of most interest to practitioners.
Academics may struggle with a reliable definition for mood but time-in-the-saddle investors will find this intuitively easier.
So, time-in-the-saddlers; where do we think sentiment is presently and what should one then be doing about that right now?
You can read the paper in full via this link Investor Sentiment and Value.
Happy Sunday.