As the sun rose on the first trading days of 2025, investors in the A-share market found themselves greeted not with the usual optimism that often accompanies a new year, but rather with unexpected declinesThe market’s lackluster start caught many by surprise as major indices experienced varying degrees of downturns over two consecutive trading daysThis early downturn severely impacted numerous funds, with many reporting a staggering drop of over 5% in net asset values on the year’s first trading dayAccording to the latest updates, while the complete adjustments from January 3 were still pending, it was evident that the declining trajectories of major stock indices would leave a significant mark on the performance of equity funds.

Financial analysts indicate that the absence of the anticipated "opening red" in A-shares is attributable to a convergence of factors, notably market rumors and the volatile international landscape that spurred noticeable fluctuations in market sentiment

Several private equity investors voice their concerns, suggesting that 2025 may present considerable challenges in securing excess returns (often referred to as alpha). Interestingly, amid this unsettling atmosphere, some fund companies maintain a cautiously optimistic outlook regarding market prospects in the months ahead.

Significant Fund Devaluations

As trading closed on January 3, the A-share market had recorded a continuous decline, marking down for three straight trading daysThe Shanghai Composite Index managed to cling to the 3200-point mark but succumbed to a 1.57% drop, while the Shenzhen Component Index dipped by 1.89%, and the ChiNext Index fell by 2.16%. Alarmingly, nearly 4,800 stocks within Shanghai and Shenzhen saw a downward trajectory, with trading volumes shrinking drastically to just 1.28 trillion yuan.

Data from Wind reveals that within the first-tier industry classifications provided by CITIC, sectors such as retail trade, computer technology, consumer services, and comprehensive finance faced the heaviest losses

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Conversely, only the non-ferrous metals and petrochemical sectors showed marginal gains, indicating a widespread downturn.

In the context of the A-share market's early-year retraction, equity funds faced notable setbacksStatistics on January 3 demonstrated that multiple broad-based Exchange-Traded Funds (ETFs) reflected declines exceeding 4%. These ETFs primarily track small-cap and micro-cap stocksFurthermore, amongst sector-specific and themed ETFs, several recorded losses exceeding 5%, notably those related to the Internet of Things, financial technology, big data, computing, and software applications.

On the private fund side, over 50 funds experienced a decline in net values surpassing 5% on January 2 alone, with the vast majority being passive index fundsThese significant losses were predominantly linked to indices tracking securities associated with software and computing

Additionally, several actively managed equity and mixed funds registered declines of over 4%, aligning with the heavy losses seen in passive index funds focused on similar sectors.

“The recent market conditions are proving challenging; currently, we need to identify safe assets and patiently wait for structural changes in the market,” noted a private equity investor.

Echoing these concerns, another investor highlighted the growing difficulty in navigating the current market, stating, “There is undoubtedly pressure ahead.” This individual emphasized that opportunities appear to be concentrated around themes related to artificial intelligence, overseas expansion, and high-dividend stocks, while finding prospects in other areas seemed increasingly challenging.

Market Influences at Play

The A-share market’s consecutive declines were unexpected for many investors

In this regard, Qiao Peitao, a manager at a financial firm, pointed to three critical factors impacting the market: firstly, a short-term retreat in market sentiment which has been perceptible since the last week of 2024, particularly among small and micro-cap stocks; secondly, an approaching year-end reporting deadline elevating delisting risks for certain stocks, with particular vulnerability among poorly performing small-cap stocks; and thirdly, the market currently finds itself in a performance vacuumSome high-frequency indicators suggest that economic recovery is not accelerating as anticipated, while investors may have inflated expectations regarding the short-term impact of policies—high-frequency data simply failing to meet those expectations.

Further analyzing the landscape, Han Wei, managing director at Taishi Investment, attributed the lack of an “opening red” for A-shares in part to market rumors and international uncertainties that resulted in pronounced emotional swings within the market.

Han further elaborated on the deteriorating investment climate for 2025, articulating that without the boosting factor of new stock explorations, achieving alpha returns from public funds has historically been challenging

The capacity to secure such returns hinges extensively on the exceptional investment acumen of select fund managers, yet discerning these talents is no less challenging than selecting individual stocks.

In Han's view, investments in blue-chip stocks with stable prospects and gratifying dividend yields remain comparatively secure choices for the year ahead.

During this period of correction in A-shares, investors are increasingly casting their gaze overseas, even if it means embracing the heightened premium risks posed by U.Sstock QDII funds.

Economist Yu Fenghui shared insights with reporters indicating that amid slowing domestic economic growth and escalating uncertainties in the A-share market, the pursuit of growth opportunities abroad has emerged as a prevailing trend

However, such enthusiasm could be coupled with a concerning level of recklessnessSome investors may become overly fixated on short-term gains, overlooking the intrinsic value of long-term investment, or fail to adequately comprehend the array of risks tied to cross-border financial activities.

When reflecting on the recent downturn in A-shares, Morgan Stanley's fund management team noted that reviewing market performance since October 2024 can frame this phase as one of wide-ranging fluctuations, asserting that the likelihood of a significant downward trend appearing soon is minimal.

Looking ahead, this fund management firm retains a positive mid-term outlook for the marketQiao Peitao maintains that while short-term turbulence may persist, the medium to long-term outlook for A-shares remains encouraging, with expectations that the macroeconomic landscape may achieve a bottom around mid-year, alongside aspirations for a corresponding uplift in the capital markets.