Multiple Funds Experience Over 5% Drop in Net Value

The beginning of 2025 has been tumultuous for China's A-shares, as they faced significant downturns right at the opening of the trading year. The Chinese stock market experienced two consecutive days of declines, with major indices showing varying levels of downturn. The impact on mutual funds was stark, as many reported net asset values plunging over 5% on the very first trading day. While the updates for January 3rd were still underway, it was clear that the negative trends would influence equity funds significantly from the observed performance of major indices throughout the day.

Market analysts attribute this disheartening start to a mix of factors, including rampant market rumors and unsettling international situations that contributed to erratic investor sentiments. Several private equity professionals noted that the investment landscape is poised for challenges in the year ahead, particularly concerning the increasing difficulty of securing alpha returns. Nevertheless, some fund houses maintain a cautiously optimistic outlook for the markets in the medium to long term.

Significant Declines in Fund Values

As of the close on January 3rd, the A-share market’s downturn over the first two trading days was alarming, with the Shanghai Composite Index managing to stay above the key 3200-point threshold but still falling by 1.57%. The Shenzhen Component Index saw a steeper drop of 1.89%, while the ChiNext Index experienced a 2.16% decline. Approximately 4,800 stocks in Shanghai and Shenzhen faced losses that day, with a noticeable contraction in trading volumes to a mere 1.28 trillion yuan.

According to data from Wind, sectors taking the brunt of the blow include trade and retail, computer technology, consumer services, and comprehensive finance, marking them as the biggest losers. In contrast, only the non-ferrous metals and petroleum sectors managed slight gains amidst the downward trend.

Due to the A-share market's early-year declines, equity funds faced considerable pullbacks. Data from January 3 indicated that numerous broad-based ETFs, particularly the CSI 2000 ETF, saw drops exceeding 4%, mainly linked to small and micro-cap stocks. In terms of sector-specific and thematic ETFs, many recorded declines over 5%, particularly in areas like the Internet of Things, FinTech, big data, computer software, and other related themes.

In the realm of out-of-market funds, over 50 funds recorded single-day net losses exceeding 5% on January 2nd, with the majority being passive index funds tied to key sectors such as software and computers. Additionally, multiple actively managed equity and mixed funds also reported over 4% losses.

“The market conditions have been challenging lately, leading to a need for finding safer investments while we wait for more favorable structural changes,” a private equity investor commented.

Another investor shared similar sentiments about the increasing difficulties in investing, declaring that “pressure is likely to persist.” They observed that the current focus for potential investments hovers around concepts like artificial intelligence, international market opportunities, and high-dividend yield stocks, finding it more challenging to identify promising ventures in other areas.

Influenced by Multiple Factors

The continuous decline of A-shares at the start of the year took investors by surprise.

In response, Qiao Peitao, a manager at Founder Fubon Fund, expressed that three main factors were at play: first, a recent downturn in short-term market sentiment, with clear signs of a recovery slowdown, particularly among small-cap stocks; second, the approaching annual report period raising delisting risks for some individual stocks, especially those with poor performance; and third, the lack of significant economic recovery, combined with inflated investor expectations regarding short-term policy impacts not being met by high-frequency data.

Analyzing the situation, Han Wei, Managing Director at Tiens Investment, attributed the absence of a “opening surge” to the same array of factors affecting market sentiment, reiterating that such volatility is often fueled by rumors and the tumultuous international landscape.

Han asserted that this year presents significant investment challenges, noting that beyond the opportunities arising from IPOs, achieving consistent alpha returns has historically been tough for public funds; much of this depends on the extraordinary capabilities of a few fund managers, making the selection process no less complex than choosing individual stocks.

He advised that in light of the landscape in 2025, investors should look for high-dividend blue-chip stocks that show stable industry prospects with some growth potential as a safer alternative.

Some investors have even begun to turn their focus toward overseas markets during this period of adjustment in A-shares, sometimes accepting the heightened premium risks associated with US stock QDII funds.

Economist Yu Fenghui remarked that amid the backdrop of decelerating economic growth in China and increasing uncertainties in the A-share market, seeking growth opportunities in overseas markets has become a trend among investors. However, this enthusiasm can sometimes demonstrate a level of recklessness as some investors focus on short-term returns while neglecting the inherent risks of long-term investing.

Regarding the recent A-share pullback, Morgan Stanley Funds viewed the situation as part of a broader range-bound trend since October last year. They argue that while the potential for a sustained downward trend appears limited, upward movements may also be capped in the near term due to the looming warnings of annual reports and the imminent transition of the U.S. Presidency, both of which could dampen market risk appetite.

Looking ahead, the fund house remains optimistic for the mid-term, believing that the market can stabilize. Qiao Peitao mentioned that the market might continue to experience oscillations in the short term, but his overall outlook for A-shares remains positive, stating, “The macro-economy might find a bottom around mid-year, and we expect that the capital markets will perform well.”

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