As much as people in China revere Warren Buffett, the domestic stock market has historically drawn more comparisons to a casino. Sentiment-driven retail investors have generally dominated the local market. In past decades, China was also growing so quickly that a business – and an investor – seemingly 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 performing so much better, according to Claire Liang, Morningstar’s senior manager research analyst. But that’s since started to change. A regulatory crackdown and a sluggish economy have depressed sentiment. “Concerns over China’s economic growth and the geopolitics in the last year or so has also led to a [preference] for Chinese companies that can deliver stable cash flows,” Liang said. “Many of the portfolio managers we spoke with, they continue to believe there are pockets of opportunity they can find through bottom-up stock picking,” she added. This year, only three out of 29 funds that Morningstar tracks have outperformed the MSCI China Index’s 5.5% decline as of the end of June. They are: BOCIP China Value A Fidelity China Focus A Dist USD Ninety One GSF All China Eq A Acc HKD The first two have a value-style tilt – and not only beat the MSCI China Index in the first half of this year, but also in all of 2022, according to Morningstar. But for many funds, near-term outperformance doesn’t necessarily mean a gain. Rather, it’s to adhere to one of Benjamin Graham’s axioms: Avoid losses. Although both value and growth China funds have generally posted losses over the three years ended July 2023, growth has lagged value by 12% a year, Liang said. However, she was quick to point out that just focusing on a single investment style such as value versus growth isn’t enough. In terms of Morningstar’s fund ratings — based on factors the firm calls people, process and parent — Schroder’s ISF China Opps and FSSA China Growth have gold ratings for strong performance in the “people” and “process” categories. Closely watching valuations helped Schroders China’s portfolio manager take some timely profits on “some overheated information technology” stocks, Liang said. “We think her valuation discipline has helped the fund better navigate the market in 2021 and 2023.” Several big Chinese companies have started to report quarterly earnings in the last 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 Asia investing has been picking stocks based on earnings revisions. It’s been “the leading style/factor strategy in Asia over the long term and [year-to-date] when the earnings downgrade cycle started to slow down,” Timothy Moe and a team said in the report. “We expect the market will continue to reward companies exhibiting this.” Here’s a selection from their list of buy-rated stocks with high and improving growth expectations for 2024, reasonable valuations and stable earnings revisions: Poly Developments — a state-owned property developer that sold the most real estate by value in the first seven months of the year, up 10% from the year-ago period, according to data published by E-House Research Institute. Fuyao Glass — an auto glass manufacturer whose U.S. venture was featured in the Netflix documentary “American Factory.” Suzhou Maxwell Technologies — a producer of solar cell manufacturing equipment.

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