The recent performance of the micro-cap stock index has seen a significant retreat, declining over 20% from its peak.

On January 3rd, the Wind micro-cap stock index fell by 4.86%. It is essential to note that since reaching a historic high on December 12, 2024, the index has accumulated a downturn of over 20% in approximately 15 trading days.

Since the "9.24 market" breakout, the Wind micro-cap stock index experienced a remarkable increase of 68.24%, vastly outpacing the Shanghai and Shenzhen 300 index's rise of 25.39% during the same period (from September 24 to December 12, 2024). Industry experts caution that the previous substantial gains necessitate vigilance over potential short-term retracement risks for the micro-cap index.

The micro-cap index has recently retracted over 20%

Since the beginning of 2024, the micro-cap index has undergone several rounds of "roller coaster" trading.

At the start of the year, significant declines were influenced by concentrated inflows into Xueqiu products and the liquidation of DMA products, causing the Wind micro-cap stock index to drop over 40% in a little more than a month

However, following the Chinese New Year, the market quickly rebounded, soaring more than 60% in two monthsFollowing the "9.24 market", the micro-cap index further surged, reaching a peak increase of nearly 70%. Yet, since mid-December, the index has been on a steady decline, with a fall exceeding 20% as of January 3, 2025.

Analyzing the recent adjustments in the micro-cap index, market insiders have identified several factors: first, concerns surrounding new delisting regulations; even though rumors about a potential delisting list emerged last December and were later denied, the micro-cap index found itself in a volatile downward trendSecond, there's been a shift in funding preferences, with many investors steering their capital towards more stable assets like dividends

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Third, trading funds that had previously enjoyed substantial gains began to take profitsSince the "9.24 market" breakout, the index's peak increase of nearly 70% prompted many trading funds to crystallize their profits.

Looking ahead, Guangfa Securities forecasts that large-cap stocks will continue to demonstrate strong performance during this market correction phaseGiven the expectations of incremental policy support, it is believed that the downward space for large-cap stocks is now quite limitedHowever, the focus on stock selection is gradually shifting towards fundamentals and the quality of large-cap sharesInvestors must remain cautious regarding the potential for sell-offs in micro-cap stocks lacking fundamental support.

Once-popular micro-cap strategy funds have also shifted priorities

It is noteworthy that despite the micro-cap stock index still showing strong potential during the "9.24 market," many public funds have already begun to "transition." In the first half of 2024, numerous funds previously renowned for their "micro-cap strategies" have pivoted towards embracing "large-cap stocks."

For instance, the influential Jin Yuan Shun An Yuan Qi fund, previously focused on a diversified portfolio of small-cap companies, began to gradually shift towards larger-cap stocks starting in 2024. By the end of the first quarter of last year, their portfolio included eight firms with valuations exceeding 20 billion RMB.

As of the third quarter of 2024, the top ten holdings of Jin Yuan Shun An Yuan Qi included China Taiping Insurance, New China Life Insurance, New Lai Materials, China Ping An, Lao Baigan Liquor, 37 Intermediary Entertainment, Jianfan Biology, Tianshan Aluminum, Xin'ao Co., and Western Mining; nine of these companies had valuations above 20 billion RMB, with three exceeding 100 billion RMB.

In their Q3 report last year, this fund stated that they remain bullish on equity assets while reducing positions in bonds

Their equity exposure consistently maintained at a medium-to-high level, emphasized diversified investments while increasingly allocating resources toward companies with proven sustainable profitability, simultaneously decreasing allocations in other asset categories.

Moreover, the quantitative fund Guojin Quantitative Multi-Factor Stock Selection has also started to change direction in the first quarter of 2024, as energy and banking dividend assets began to appear in their top ten holdingsBy the end of the last third quarter, their leading holdings were Kweichow Moutai, Huatai Securities, Nanshan Aluminum, Youfa Group, Shede Liquor, Lao Baigan Liquor, Hangzhou Bank, Conch Cement, Dongxing Securities, and Chint Electric.

Previously, insiders suggested that with the release of the new "Nine Policies", public fund managers have tightened their criteria for selecting stocks

Consequently, we may expect a reduction in public products employing micro-cap stock strategies.

Bosera Fund's Index and Quantitative Investment Division noted that following the new "Nine Policies" announcement, the market has grown more intent on focusing on company fundamentalsPublic quantitative strategies will need to reassess the weightings of fundamental and market factors, and it is crucial to exclude potentially risky stocks when constructing portfolios, thus minimizing exposure to stocks prone to risk eventsAs fluctuations in micro-cap stocks become more pronounced, some financial resources may reduce their exposure to such stocks, potentially lowering their liquidity, which investors must consider when trading.

For investors considering micro-cap stocks, risk management is vital

ZH Silver Hua fund manager Zhang Kai cautions about several risks: the first is liquidity riskShould market liquidity tighten due to policy adjustments or changes in international environments, funds may flow toward larger-cap stocks with better liquidity, putting pressure on micro-cap stocksSecondly, macroeconomic fluctuations could undermine the growth expectations of micro-cap stocks, leading to potential valuation declines if the economic recovery fails to meet market anticipationsThirdly, there is the possibility of market style switching; if large-cap blue-chip stocks regain favor, this may divert funds away from micro-cap stocks, resulting in a change of market focusLastly, behavioral risks from investors; short-term gains could lure speculative capital, causing drastic price fluctuations or even interim corrections that might lead to mispricing of stocks due to inadequate information disclosure surrounding micro-cap stocks.