As the year 2025 dawns, the Chinese A-shares appear to be on shaky ground, with the market experiencing a series of downturnsOver the initial two trading days of January, major indices faced varying degrees of decline, leaving many investors startledVarious funds have suffered significant drops in net asset value right at the start of the year, with reports of some losing more than 5% in just one dayAlthough data for January 3 has yet to be final, preliminary reports indicate a continuing trend that has negatively impacted numerous equity funds in the context of broader market performance.

Market analysts suggest that the absence of a “red opening” – a hallmark of auspicious beginnings – stems from a combination of rampant rumors circulating within the market and ongoing international turbulence which has adversely shifted investor sentiment

Several private equity professionals have indicated that the investment landscape this year may prove challenging, particularly in terms of capturing alpha (excess returns). Nevertheless, some fund management companies hold a bullish outlook on the future market trajectory from a mid- to long-term perspective.

Significant Drops in Valuation for Many Funds

By the close on January 3, the A-share market had plunged for two consecutive days, with nearly a week of declinesThe Shanghai Composite Index struggled to hold the 3200-point mark, closing down by 1.57%. The Shenzhen Component Index saw a larger decline of 1.89%, while the ChiNext Index dropped by 2.16%. On that day alone, close to 4,800 stocks in the Shanghai and Shenzhen markets saw losses, with total trading volume substantially reduced to merely 1.28 trillion yuan.

According to data from Wind Information based on Citic's primary industry classification, sectors such as retail, computing, consumer services, and comprehensive finance led the losses, while the metals and petroleum sectors managed to post minimal gains.

In light of this downturn, equity funds have also faced noticeable retracements

January 3 was particularly harsh for various ETFs tracking broader indices, with several CSI 2000 ETFs reporting in-market declines exceeding 4%. This category of ETFs primarily encompasses small- and micro-cap stocksAdditionally, themed industry ETFs, particularly those focused on the Internet of Things, fintech, big data, computing, and software, suffered declines greater than 5%.

On the side of off-market funds, over 50 funds recorded daily net value declines exceeding 5% on January 2, with most of these being passive index funds closely linked to securities in sectors such as software and technologyFurthermore, a number of actively managed stock and mixed funds also posted declines greater than 4%. These actively managed funds tended to mirror the trends seen in the larger decline of passive index funds with significant holdings in software, technology, and semiconductors.

“The current market conditions are quite challenging; it's paramount to explore safer asset options while we await a more stable market situation,” remarked a private equity investor.

Another seasoned investor conveyed their own frustrations with the current volatility, stating, “There will undoubtedly be pressure in the near term.” This individual noted that investment opportunities currently seem largely concentrated in concepts related to artificial intelligence, overseas expansions, and high-dividend opportunities, making it difficult to explore other avenues.

Impact from Multiple Factors

The unanticipated downturn of the A-share market at the start of the year has taken many investors by surprise.

According to Qiao Peitao, a manager at Founder Fubon Fund, this downturn can primarily be attributed to three key factors: the first being a short-term setback in market sentiment

Evidence of this can be traced back to the last week of 2024, where notable indicators of declining market sentiment emerged, particularly among smaller and micro-cap stocksThe second factor is the looming year-end reports which heighten the delisting risks for certain stocks, especially those from small and micro-cap firms with subpar performanceLastly, despite the absence of noteworthy earnings reports at present, high-frequency data suggests a lack of vigor in economic recovery, with some investor expectations for short-term policy impacts proving overly optimistic, as the high-frequency data does not meet these anticipations.

Han Wei, Managing Director of Taishi Investment, analyzed the current scenario, pointing to market rumors and international instability as major contributors to the fluctuations in market sentiment that have impeded the A-share market from opening the year on a positive note.

According to Han, this year's investment landscape poses significant challenges

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“Setting aside profit from new stock offerings, it has consistently been a struggle for mutual funds to realize alpha returns—a task reliant mainly on the exceptional investment acumen of specific fund managers, and navigating these selections is not much easier than picking stocks themselves,” he contended.

In Han’s view, prioritizing stable sectors with steady growth potential, particularly high-dividend blue-chip stocks, may provide a safer route forward in 2025.

During this short-term adjustment in the A-share market, many investors have turned their eyes to overseas opportunities, even willing to take on the high premium risks associated with QDII funds for U.Sstocks.

Economist Yu Fenghui commented that in light of China’s slowing economic growth and the uncertainties surrounding the A-share market, the trend of investors seeking growth in foreign markets has emerged

However, this enthusiasm is not without its risks, as some may overly focus on short-term gains while neglecting the value of long-term investment or lacking a thorough understanding of the various risks linked with cross-border investments.

Morgan Stanley Fund, while reflecting on the recent market fluctuations, noted that when reviewing markets since last October, the situation resembles a wide range of oscillations“We are still within this oscillation phase, and while there is little likelihood of a pronounced downturn, the potential for upward movement in the short term is also limitedStarting mid-month, the annual report warnings may further dampen market risk appetite,” they reported.

Looking ahead, the fund company maintains an optimistic outlook regarding the market, asserting that while short-term fluctuations may persist, the long-term prospects for A-shares remain positive