The A-share market is once again experiencing a downturn, an occurrence that has caused ripples of concern among investors and analysts alike.
On May 23, the market opened on a low note and continued to decline throughout the day, with all three major indices dropping more than 1.3%. By the end of the trading session, the Shanghai Composite Index had fallen by 1.33%, the Shenzhen Component Index by 1.56%, and the ChiNext Index by 1.38%.
The situation was dire, as over 4,500 individual stocks across the market faced declinesThe trading volume for the Shanghai and Shenzhen stock exchanges reached 847.7 billion yuan, an increase of 16.5 billion yuan compared to the previous trading day, indicating heightened activity amidst the downward trend.
What has led to this collective retreat across the major indices, and how will the market fare in the future?
Analyzing the data from the Shenwan Primary Industry Index reveals that all 31 sectors turned negative, a stark indication of the pervasive decline, with a visual representation showing a sea of red across the sector performance charts.
Leading the downturn were sectors such as non-ferrous metals and social services, both of which dropped over 3%. Other sectors, including media, retail, steel, computing, basic chemicals, and personal care, also faced significant declines.
Despite the overall downtrend, there were pockets of resistance within certain sub-indices
For instance, segments like ground weaponry, maritime equipment, and white goods showed relative resilience, marking them as "a single red flower among a prairie of green." Only the ground weaponry sector saw an increase of over 2%, while both maritime equipment and white goods registered slight gains.
Specifically, the ground weaponry sector rose by 2.65%, with eight stocks within this classification showing gains, while four stocks slippedAmong them, companies like Great Wall Military Industry reached their daily limit with a remarkable surge, and others such as China Shipbuilding Emergency and Tianqin Equipment also saw rises exceeding 5%.
So, what triggered the market's sharp decline?
Insights from interviewed analysts suggest that the sudden plunge in the A-share market can be attributed to multiple intertwined factors.
Firstly, turbulence in international markets plays a crucial role
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Yang Yijie, a researcher at Wall Gecko Capital, believes that the recent fluctuations are caused by a cooling expectation regarding interest rate cuts from the Federal ReserveAs a result, valuation pressures on growth stocks may rise.
News from May 22 revealed that Michael Barr, responsible for oversight within the Federal Reserve, reiterated the necessity for maintaining stable interest rates longer than previously anticipated to curb inflation completely.
Following this stance, Yang mentioned that the morning session saw most major Asian stock markets trading weakly, with beneficial sectors such as commodity metals also experiencing notable declines.
According to Xia Fengguang, a fund manager at Rongzhi Investment, the catalyst for the market's plunge was the violent reactions from overseas markets and the commodities space
This sentiment was exacerbated by Wednesday’s release of the Fed's minutes, indicating a more hawkish approach and further delays in interest rate cuts, leading to significant sell-offs in commodities like copper, silver, and gold.
Secondly, profit-taking among investors has compounded the adjustmentsHao Xinming, an investment fund manager at Fangxin Wealth, pointed out that today's market realignment represents a realization of structural profitsThe A-share market's rebound since the start of the year primarily stemmed from a return to valuation levels, without supportive growth data from annual or quarterly reports.
Furthermore, Chen Xingwen noted that the completion of ETF options settlement in May and movements by some principal funds to shake off positions might also contribute to the downward momentum.
Another crucial aspect highlighted by Cheng Liang, a fund manager at SanSan Capital, is the absence of incremental capital in the market, which is vital in maintaining a stable trading environment
This lack of fresh investment potentially results in continued oscillations, with sectors shifting in and out of favor but no clear leading themes emerging.
Looking ahead, Chen Xingwen suspects that A-shares' performance will hinge on various influences, including improvements in macroeconomic indicators, supportive policies, corporate earnings recovery, and shifts in market sentimentWhile the current environment does present some downward pressures, the fundamental backdrop remains stable, particularly for blue-chip stocks with high dividends and low valuations that may offer solid defensive characteristics.
However, he warns that investors should remain vigilant regarding potential risks that could affect the market, including geopolitical uncertainties, international market volatility, internal economic fluctuations, and changes in regulatory policies
Investors are encouraged to adopt a cautious stance, continuously monitor market dynamics, and strategically allocate assets to manage potential threats.
Cheng Liang also asserts, "In 2024, the overall market must ensure stability, which differs significantly from the extreme conditions of 2023. We remain optimistic about the market's prospects."
For Hao Xinming, the market is likely to continue its value recovery path in low valuation sectors that offer dividends while also stimulating thematic investments based on policy catalystsHowever, should these avenues reach saturation, there may be a higher chance of market weakeningTherefore, the rhythm of market operation this year may lean towards oscillation
Enthusiastic investors are advised to recognize the potential for positioning during low points in the market cycle and exercise patience in timing their operations.
Huang Senwei, a senior market strategist with Lionbrook Fund, emphasizes that given the prevailing concerns regarding US inflation and sustained dollar rates, the Chinese stock market stands a solid chance of becoming a focal point for global capital allocationAdditionally, the current valuations in the A-share market position it as an attractive opportunity for long-term investments.
Yang Yijie reassures that the Fed’s impact on A-shares will be temporary, as the current valuations are still positioned near historical lows
Coupled with policy-driven stimuli, these factors could provide essential support for future index strengthFurthermore, with the AI sector evolving rapidly through new products and technologies, this industry is poised for significant growth, potentially aiding a market reboundHe remains optimistic about sectors like artificial intelligence, innovative pharmaceuticals, consumer goods, semiconductors, and high-end manufacturing as they present promising development potential in the upcoming market landscape.
Xia Fengguang's analyses highlight that powerful indices like the SSE 50 and CSI 300 have not significantly changed in their momentum toward capital aggregationAlthough undergoing adjustments is not necessarily adverse, these indices may continue to lead in performance, while smaller cap stocks might face relatively heightened pressures in the short term