A-Share Market Plunges
This week, the A-share market experienced a two-tier reversal. On Monday and Tuesday, the banking and securities sectors reached a climax, propelling the Shanghai Composite Index to break through 3,400 points and set a new high for this stage. The surge in stocks like Bank of China and several other banks, as well as brokerage firms like CICC, became emblematic of the market's emotional peak. However, after reaching this peak, market sentiment took a sharp turn for the worse. The two main themes of artificial intelligence (AI) and "China Special Valuation" (CSG) underwent significant adjustments, and the plummeting of heavyweight sectors led to a dive in the Shanghai Composite Index. By Friday, the index had fallen below 3,300 points. In just two weeks, we witnessed the Shanghai Composite Index rising from 3,200 to 3,400 and then falling back to 3,200, with market fluctuations so extreme that most retail investors found it hard to bear.
Specifically, this week saw the Shanghai Composite Index decline by 1.86%, the Shenzhen Component Index by 1.57%, and the ChiNext Index by 0.67%, with the ChiNext Index showing signs of stabilizing. Looking at the market value style indices, the large-cap CSI 100, mid-cap CSI 500, and small-cap CSI 1000 indices all experienced considerable declines, indicating a broad market sell-off.
From the perspective of the National Index style indices, the value style, which was strong in the early part of the week, saw larger declines than the growth style, which had been weak previously. Mid-cap value and large-cap value led the decline, primarily due to significant pullbacks in state-owned enterprises.
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By industry, this week saw utilities, coal, automobiles, power equipment, and environmental protection sectors leading the gains, while the construction decoration, media, non-ferrous metals, commercial trade, and petroleum and petrochemical industries led the declines. This was mainly due to adjustments in the two main themes of CSG and AI, with strong sectors experiencing catch-up declines. The gaming ETF, which had doubled in value, saw its gains narrow to 80%, while the previously weak new energy sector rebounded.
We believe there are two main reasons for the significant adjustments in the A-share market this week:
Firstly, AI and CSG, as the two main themes in the previous period, their adjustments inevitably lead to a substantial decline in the market's profit effect, suppressing market risk appetite. If the decline is too great, it may even lead to panic selling.
AI and CSG need to be considered separately: The AI theme has already differentiated. Hardware sectors such as semiconductors, CPO, and servers peaked and adjusted back in April, mainly due to the suppression of first-quarter earnings reports. Subsequently, it was mainly the media sectors like film, gaming, and publishing that reached a climax, indicating that AI speculation had spread to the final stage. In the past two weeks, the media sector has also weakened significantly, leading to a substantial overall adjustment in AI.
The speculation on CSG can be divided into three stages. Initially, it was driven by the digital economy with telecom operators and by the Belt and Road initiative with infrastructure construction. After these two sectors surged significantly, the concept of "CSG" began to take root, further spreading to the banking and securities sectors, and even to the idea of eliminating undervalued state-owned enterprises. However, banks do not have as strong a logic or as much imagination as telecom operators and infrastructure, and the rotation to banks also indicates that the spread has reached its end.Second, the CPI and social financing data released this week significantly undershot expectations, leading to a renewed decline in market expectations for economic recovery and intensifying concerns about deflation. At this time last year, the market could still speculate on policies aimed at stable growth, but according to the tone set by a key meeting at the end of April, it is unlikely that there will be any comprehensive stimulus policies in the short term. The market is caught in an awkward situation of "weak reality and weak expectations," with a significant shift towards risk aversion and adjustments in both the recovery line and thematic investments.
Looking ahead to next week, the predicament of the A-share market lacking new expectations remains unchanged. However, it is important to note that even a weak recovery is still a form of recovery, and the downside for A-shares is limited. Moreover, the market's pessimism about economic recovery is excessive, and there is room for correction. On one hand, this year there has been no strong stimulus in policy terms, and it is inevitable that the Chinese economy, which is in the early stages of recovery, will exhibit structural imbalances that should not be generalized. On the other hand, the economy still faces downward pressure, especially in terms of employment, and there is still a need for policy support, so policies aimed at stable growth can still be anticipated.
Funds
Due to the significant adjustment in A-shares, public mutual funds also suffered substantial losses this week, with the ordinary stock fund index falling by 2.38% and the mixed stock fund index falling by 2.48%. Additionally, as expectations for recovery weakened, the ten-year government bond yield plummeted, and the bond market strengthened, with the bond market outperforming the stock market this week.
Specifically, looking at ordinary stock funds, due to a rebound in the new energy sector, new energy-themed funds led the gains this week, with Harvest Advanced Manufacturing, CCB Environmental Protection Industry Equity, and Harvest New Energy New Materials Equity ranking at the top.
Among mixed stock funds, Morgan Stanley Modern Service Industry, Xin Ao New Energy Selection, and SDIC Ruiyin Industry Upgrade Two-Year Hold led the gains. Upon examination, the heavy investment direction of Morgan Stanley Modern Service Industry is Apple MR, mainly stimulated by the Apple new product conference in June.
In terms of year-to-date gains, although the returns of artificial intelligence-themed funds have significantly dropped, they still lead in terms of year-to-date gains. China Merchants Sports Culture, Tai Xin Industry Selection, and GF Information Technology Media Equity have achieved the top three year-to-date returns.