Stock indices continued the weak market conditions from 2022, with the anticipated strong recovery failing to materialize. Although hot topics such as AI (Artificial Intelligence), robotics, China-specific valuations, and micro-cap stocks emerged continuously, more than half of the A-share market's stocks rose. However, due to the rapid rotation of these hot spots and their concentration in some niche areas, the overall market's profit-making effect was not satisfactory.

For public funds that were previously concentrated on core assets and mainstream tracks such as new energy and consumer goods, this winter has been particularly long. The Wind equity fund index fell by 13.5% for the year, with a fluctuation of 24%, and the highest price occurred on February 2, 2023. Core assets represented by the CSI 300 have seen a significant contraction in valuation since the beginning of 2023, adjusting from the 28th percentile at the start of the year to less than the 20th percentile by the end of the year. The valuation of the ChiNext Index has also approached the bottom extreme value range at the end of 2018.

Regarding the causes of this weak market, institutions have provided various explanations. In terms of valuation, the valuation of sectors previously favored by institutions has been reduced. Fundamentally, the expectation of a strong post-pandemic recovery has been proven false, consumer momentum is insufficient, the land economy is declining, and macroeconomic data is weakening. In terms of capital, the accelerated outflow of foreign capital in the second half of the year has increased market fear, and the market's response to the continuous introduction of favorable policies has been lukewarm. The Shanghai Composite Index fluctuated repeatedly around 3000 points and ultimately closed at 2975 points.

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Under the weak market, actively managed equity funds faced a crisis of confidence, and ETFs became popular. Dividend assets have become deeply rooted in people's hearts, and AI is still in its infancy. Amid the micro-cap stock craze, stocks on the Beijing Stock Exchange have been revalued.

Looking forward, some institutions believe that large-cap growth stocks represented by new energy and pharmaceuticals are significantly undervalued. Since the Political Bureau meeting, policies have been introduced frequently, initiating a new cycle of policy support for the capital market.

On October 24, 2023, the issuance of trillion-yuan government bonds dispelled investors' concerns about the lack of strength in subsequent stable growth policies, and the market revised its medium and long-term economic expectations. Some institutional personnel even believe that A-shares are now at the starting point of a new bull market. At the same time, there are also some unnamed fund managers who say, "We are not as optimistic as we claim to the outside world."

Beijing Stock Exchange turns against the wind

Wind data shows that among the core A-share indices, the ChiNext-related indices have the largest decline, with the ChiNext Growth index falling by 26% for the year, the ChiNext 50 index falling by 24%, and the ChiNext index falling by 19.41%.

Previously, the performance of the STAR Market index, which many technology fund managers were optimistic about, was also relatively average, with the STAR 100 falling by 12% and the STAR 50 falling by 11%.The traditional representative of the broad market index and an important benchmark for institutions, the CSI 300, fell by 11%. The Shanghai Composite Index, which fluctuated around 3,000 points, saw a relatively smaller decline, with a full-year drop of 3.7%.

Among the core indices, the few that turned positive include the dividend index, the Zhongzheng 2000 driven by the micro-cap stock market, and the Beixin 50. The Wind Micro-cap Stock Index rose nearly 50% for the year.

Looking at the industry breakdown, data from the Shenwan first-level industry classification shows that the communications, media, computer, and electronics sectors led the gains, with the communications sector leading the A-share market with a 25% increase. The sectors that saw larger declines include beauty care, retail, real estate, and power equipment.

Data indicates that out of 5,335 A-shares, 2,869 individual stocks rose, accounting for 54%. Despite the presence of hot spots in the A-share market in 2023, there was a lack of profit-making effects.

On one hand, the rotation of hot spots this year was very fast, and for many trend investors, the hot spots were over before they could react. The most typical example is the hottest sectors of the year, communications and media, which saw their highest prices on June 20th, with an annual sector return of about 20%, while the full-year fluctuation was around 60%. This also means that a large number of "chasers" were left holding the bag at high levels.

The market structure also determined that the investment experience this year was "colder" than what the index level reflected. At the annual strategy meeting, Zhaoshang Fund's fund manager Cai Yubin analyzed, "Many of the stocks that rose this year are micro-cap stocks that institutions and traditional individual investors hold very little of, and they do not bring a good wealth effect. Those that everyone holds more of, such as the CSI 300, have experienced significant adjustments instead."

From the top ten gains and losses of the Wind popular concept index, the optical module index leads by a large margin with a 135% increase. In addition, other concept sectors with higher gains include the smallest market value, Huakun Zhenyu, multimodal models, optical communication, ChatGPT, AI computing power, PEEK materials, Chinese language corpora, and East Data West Computing.

The sectors with larger declines are concentrated in photovoltaic inverters, lithium battery anodes, sodium-ion batteries, lithium battery cathodes, power equipment, power batteries, lithium iron phosphate batteries, air transport, energy storage, and real estate.QDII Funds Outperform

The aforementioned declining sectors also happen to be the ones that public mutual funds have heavily invested in over the past two years.

"The so-called core assets that everyone was optimistic about over the past three years have almost been halved," said Zhu Hongyu, Chief Research Officer at China Merchants Fund. The core reason is that in 2020 and 2021, when the total economy was at a high point and the industry cycle was relatively high, excessively high pricing and optimistic expectations were given, leading to an extremely crowded state of public mutual fund holdings.

As of December 30th, QDII funds emerged as the best performers, primarily investing in Nasdaq. Meanwhile, many institutional investors' benchmark, the Wind Equity Fund Index, fell by 14% for the year.

The fund managed by Li Yaozhu, the fund manager of Guangfa Fund, the Guangfa Global Selection RMB, achieved the highest return, with an annual return rate of 67.63%. Among domestic equity funds, the first batch of Beijing Stock Exchange (BSE) themed funds, which had previously suffered losses, made a collective comeback. Among them, Gu Xinfeng's China BSE Innovation Small and Medium Enterprises Selection achieved an annual return of about 59%. Just two months ago, in early November of this year, the fund's return rate was only 15.92%, but after November, influenced by policy factors, the BSE market rose strongly, and its return rate gradually climbed, eventually entering the final circle with a return rate of 58.56%. Top Ten Fund Returns in the Market

In the list of the worst performers, the funds ranked in the last ten for return rate all suffered losses exceeding 40%. Among them, the Shanghai Bank New Energy Industry Selection C, managed by Shanghai Bank Fund's fund managers Shi Minjia and Zheng Zhong, ranked last with a return rate of -46.5%.Opportunities and Challenges in 2024

During the last trading week of 2023, the A-share market once again staged a reversal, with the previously oversold new energy sector leading the charge. Data from the first-level industries of Shenwan show that sectors such as power equipment, national defense, petroleum, and food and beverages have strengthened, while the media sector has declined by nearly 9%.

Furong Fund analysis suggests that the main reason is market concerns about a shift in industry regulation, with signs of strong stocks in the technology sector making up for the decline. "Everything is cyclical, and at this point, the valuations of the CSI 300 Index, which represents large-cap stocks, and the ChiNext Index, which represents growth, have approached the bottom extreme range at the end of 2018. At the current position, we are optimistic about the mid-term market moving upwards in a volatile manner."

Zeng Hao, the fund manager at Bosera Fund, summarized the performance of the A-share market over the past year, stating that the value style has clearly outperformed the growth style. Essentially, it is because the growth stocks in the sectors such as new energy, consumer goods, and pharmaceuticals, which are heavily held by public funds, have underperformed the low valuation and TMT sectors. The weakness of the heavily held stocks by funds is due to the fact that this year's corporate profit recovery did not meet expectations, and the remaining liquidity expansion has driven the performance of small-cap stocks. The TMT sector is driven by overseas ChatGPT industry events, while the coal and petrochemical sectors are supported by the strong resilience of energy prices due to upstream supply constraints.

"Although there is still disagreement in the market about the effectiveness of policies and the elasticity of economic recovery, the appearance of the profit bottom and the government's re-leveraging indicate that the market has entered the bottom range. Looking at the market from the current perspective for 2024, the market is expected to move out of the volatile upward trend," Zeng Hao said.

East Wu Securities believes that as China's policies gradually take effect, policy efficiency may rise with the downward trend of external interest rates. As price factors gradually recover, the nominal GDP (Gross Domestic Product) growth rate will rise. However, with the decline in overseas inflation and the actual growth rate being hindered by factors such as broad credit, the nominal GDP growth rate will decline. The difference in nominal GDP growth rates between China and the United States will converge, which will be a core factor in the repair of Chinese asset prices.

Debang Securities, in its annual strategy series report "Population: The Real Challenge," stated that China has entered a moderately aged society. The current housing prices have not experienced a significant short-term decline, and it is not appropriate to conclude that it is a Japanese-style balance sheet recession. However, aging may accelerate the release of risks in the economic structure, and the pressure on local governments in China to reduce debt is still significant. The credit of residents and enterprises remains sluggish, and the willingness of economic entities to leverage is low, with the intention to consume and invest weaker than the willingness to save.