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The Sunday Paper – Is Value Strategy Still Alive? Evidence from the Chinese A-Share Market

Investors in Chinese growth stocks have been keelhauled over the last 18-months, especially in those U.S. listed China shares they were persuaded were facsimiles of companies they were already familiar with (does this sound familiar? It’s the so-and-so of China, and etcetera).

Let’s not dwell on that foolishness. On then to the next foolishness. Or perhaps not if its done right.

I’m referring to the China domestic A-share markets. These are being touted now as the ‘safer’ way to access China. The arguments have some appeal based on the fact the A-share markets have gone sideways for these past few years (albeit with a bit of a wobble very recently) so give the appearance of being reliable-ish and stable-ish which, of course, they’re anything but. They’re also mysterious which is a reliable come-on if you’re trying to round up rubes.

Whatever; if you’re thinking about a dip, or even a plunge you should take a close look at the paper highlighted today, from Frank Yulin Feng (et al.) of the Shanghai University of Finance and Economics.

The work highlights a reliable strategy for A-shares based on an analysis of 20-years of data from Jan.-’99 to Dec.-’20 and for the sake of brevity I’ll cut to the chase. ‘Value’ works in China.

It works in the U.S. too but there the shorting of high value stocks has been a multi-year bad idea which is one of the main reasons why the ‘value-factor’ there has such a bad reputation (that’s a diversion for wonks the paper goes into more detail on if you’re now scratching your head).

In China however the researchers discovered that buying stocks with robust profits was a winning strategy. There was some advantage to concentrating the analysis on Gross Profits but both Operating and Net Profit analysis would have provided nearly as good returns. Book to Market didn’t seem to work quite so well unless it was combined with the profit strategy. The final important point is that an analysis of semi-annual results produced better results than just a look at annual releases.

There’s a bit more to it than that but if your interest is sufficiently piqued you can review the paper in its entirety via the following link Value Investing in A-Shares: Who Knew?

Happy Sunday.

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