Continuing the weak trend from last week, the A-share market at the beginning of this week showed a feeble performance.

On Monday (June 24th), the market opened low and continued to decline throughout the day, with small and medium-sized stocks experiencing a widespread drop and the semiconductor sector undergoing a collective correction. By the close, all major indices had fallen, with the three major indices all down more than 1%, with the Shanghai Composite Index closing at 2,963.1 points, and nearly 5,000 stocks across the market falling. Industry sectors saw a universal decline, with transportation equipment, optical electronics, and semiconductors leading the losses. The total transaction volume for the day in both markets was 695.6 billion yuan.

The A-share market fluctuated and fell, with small and micro-cap stocks once again declining. According to Wind data, by the close of the day, out of 3,156 stocks with a market value of less than 5 billion yuan, 2,962 stocks fell, accounting for more than 98.85%. Stocks such as Jinghua Micro, Aidi Pharmaceutical, and Yingboer fell more than 10%.

This year, micro-cap stocks have undergone several adjustments. Recently, the intensification of delisting risks has triggered market panic towards small and micro-cap stocks, leading to another "exodus" of funds. At the beginning of June, the micro-cap stock index experienced a four-day consecutive decline.

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After nearly a month of adjustment, why is the A-share market still weak? And why have small and micro-cap stocks plummeted again? Zhang Yufeng, the chief market strategist at AVIC Securities, told Yicai that in the short term, the Shanghai Composite Index's 3,000 point level, an important psychological threshold, broke last week, which had a certain impact on market sentiment and led to a reduced volume decline in the market on Monday.

A senior strategy analyst told the reporter that the adjustment of micro-cap stocks is affected by several factors, including increased uncertainty in the macroeconomic environment, strict enforcement of delisting new rules, significant impact on the liquidity of small and micro-cap stocks, and market sentiment fluctuations leading to large sales.

"In fact, many people have already sold off this part (micro-cap stocks) now," a rights fund manager in South China told the reporter, noting that active funds have a strong willingness to exit, coupled with poor market liquidity, leading to the aforementioned situation.

However, some funds are already testing the "bottom fishing." Near the close on the morning of the 24th, several Shanghai-Shenzhen 300 ETFs, including Shanghai-Shenzhen 300 ETF Yifangda and Shanghai-Shenzhen 300 ETF Huaxia, once again saw an increase in volume.

"During the process of the market's decline, several Shanghai-Shenzhen 300 ETFs and Shanghai 50 ETFs have clearly increased in volume, indicating that large-cap stocks are the main direction for market support," the aforementioned fund manager said, adding that in comparison, small-cap stocks lacking funding support have a significantly weaker trend than the market.

How long will this round of adjustment continue? Some analysts believe that the current market volume has not been effectively released, market sentiment remains weak, and it will take some time for policies to take effect. The industry expects that the market is in a channel of fluctuating decline, but there is limited room for further downward movement in the short term.The three major indices fell by more than 1%

On the morning of the 24th, the three major indices opened lower collectively, with the Shenzhen Component Index leading the decline and small and medium-sized stocks falling across the board. Electricity stocks once lifted, with Xichang Power's stock price hitting the daily limit, while pharmaceutical stocks underwent a collective adjustment. By the close of the day, all three indices had fallen by more than 1%, with the Shanghai Composite Index down 1.17%, the Shenzhen Component Index down 1.55%, and the ChiNext Index down 1.39%.

In terms of sectors, semiconductors, communications, and healthcare led the decline. In the semiconductor sector, Jinghua Micro fell by more than 16%, while Qipai Technology and Kaiwei Technology fell by more than 14%.

Regarding indices, both the STAR 50 and the Beijing Stock Exchange 50 indices fell by more than 2%. Specifically, the STAR 50 fell by 2.54%, with only three constituent stocks closing higher, with Xilinx Integration rising by 3.28%, and Lanqi Technology and PnP Technology slightly increasing by 0.56% and 0.4%, respectively. Daqo Energy, Fudan Microelectronics, and Xingyuan Shares fell by more than 5%. The Beijing Stock Exchange 50 index approached its previous low. On the 24th, the Beijing Stock Exchange 50 fell by 3.73%, closing at 703.35 points, setting a new low for the year, which is close to the previous low of 702.55 points in October last year.

"The adjustment in the semiconductor sector, we believe, is a profit-taking after the previous rise," said Zhang Yufeng.

However, in the morning near the close, several ETFs tracking the CSI 300, including the Huaxia CSI 300 ETF, the E Fund CSI 300 ETF, and the China AMC CSI 300 ETF, saw an increase in trading volume again.

"Looking at the overall trend, broad-based ETF products represented by the CSI 300 ETF have once again seen a significant increase in volume, indicating that some important institutions are playing a role in injecting funds to stabilize the entire market," Zhang Yufeng stated, but the market needs some time to react and digest, and market stabilization requires the concerted efforts of various funds.

Micro-cap stocks plummet again

As A-shares fluctuated and declined, micro-cap stocks continued to fall.

By the close on the 24th, out of 3,156 stocks with a market value of less than 5 billion yuan, 2,962 stocks fell, accounting for more than 98.85%. Jinghua Micro, Aidi Pharmaceutical, and Yingboer, among 25 other stocks, fell by more than 10%.The Wind Micro-cap Index opened lower and fluctuated downwards, eventually closing with a single-day decline of 4.34%. Since the beginning of this month, the Micro-cap Index has been continuously adjusting. Wind data shows that as of June 24th, the Wind Micro-cap Index has accumulated a drop of 12.22% from the beginning of the month, with the small-cap style represented by the CSI 2000 and the China Securities 2000 Index falling by 10.71% and 9.43% respectively during the period.

As the market and indices corrected, related thematic ETF products also took a hit. Wind data indicates that on the 24th, the Fullgoal CSI 2000 ETF led the stock-type ETF products with a single-day decline of 4.29%; among the top 20 products with the largest declines, the CSI 2000 ETF products occupied 8 seats.

Among the 19 products currently tracking the CSI 2000 and China Securities 2000 indices, the average decline on the 24th was 3.63%, and the average decline over the past month was 8.83%. The product with the largest decline was the Huatai-PineBridge CSI 2000 ETF, which has accumulated a decline of 10.29% over the past month.

Under performance adjustments, some funds are also rapidly withdrawing. Wind data shows that as of the 21st, among the 19 ETFs related to the CSI 2000 and China Securities 2000 indices mentioned above, 13 products experienced net outflows of funds, with a total outflow exceeding 330 million yuan.

In terms of fund shares, products such as the Guotai Junan CSI 2000 ETF and the Harvest CSI 2000 ETF have seen a reduction of more than a quarter in the past month. The Fullgoal CSI 2000 ETF, Jingshun Great Wall China Securities 2000 ETF, and Huaxia Fund CSI 2000 ETF have also experienced不同程度的减少 in shares.

At the same time, several products such as the Shanghai-Shenzhen 300 ETF, CSI 500 ETF, and Shanghai 50 ETF have shown a significant increase in trading volume. Wind data shows that on the 24th, the Huatai-PineBridge Shanghai-Shenzhen 300 ETF achieved a full-day transaction volume of 7.315 billion yuan, higher than the average daily transaction volume of 2.819 billion yuan last week. In addition, the transaction volumes of the Southern Fund CSI 500 ETF and the China Asset Management Shanghai 50 ETF both exceeded 3 billion yuan, significantly higher than the average daily transaction volume of the previous week.

In fact, since the beginning of this year, micro-cap stocks have undergone several adjustments. Wind data shows that as of June 24th, the Wind Micro-cap Index has accumulated a decline of 28.61% year-to-date.

"In the history of A-shares, there have been many extreme rotations between large-cap and small-cap stocks. Reviewing each scenario where small-cap stocks systematically underperformed, the main factors come from two aspects: one is the impact of regulatory guidance, and the other is that the economic fundamentals are in a stage of stock optimization, with expectations of performance improvement for leading companies," Tang Xiaodong, Co-General Manager of the Macro Strategy Department of Southern Fund, said to Yicai, adding that these two factors are also present at the current point in time, and it is expected that the headwinds for small-cap stocks have not yet ended.

"Therefore, during the systematic decline of small-cap stocks, it is highly likely that many high-quality small and medium-sized companies have been mistakenly killed," he also mentioned.

As small and micro-cap stocks continue to adjust, will institutional investors adjust their strategies?"In an environment where the market demands higher quality from companies and overall liquidity is poor, we will further increase the weight of fundamental factors in portfolio construction," a quantitative fund manager told the reporter. In addition to adjusting factors, they will also set up a stock pool to be excluded based on some fundamental requirements, and exclude them when buying stocks.

The aforementioned strategy analyst also told the reporter that in the face of a significant market downturn and a substantial drawdown in product net value, on the one hand, they will strengthen risk management by setting stricter stop-loss points and position control to reduce losses; on the other hand, they will flexibly adjust the strategy model, such as increasing holdings of stable assets and reducing dependence on high-risk small-cap stocks.

Waiting for sentiment to recover and policies to take effect

Since late May, the A-share market has turned to a period of consolidation, and this round of adjustment has lasted for a month. After the Shanghai Composite Index reached a new high of 3,174.27 points on May 20, it began to fluctuate horizontally.

Looking at the situation last week (June 17-21), according to data from CICC, the average daily turnover of A-shares continued to fall to around 71 billion yuan, and it shrank to 62 billion yuan on Friday (21st), close to the lowest level since the beginning of the year. Northbound capital continued to outflow, with a net outflow of 16.1 billion yuan for the week.

Regarding the recent trend, Li Qiusuo, Chief Domestic Strategy Analyst at CICC Research, said that since the end of May, the A-share market has continued to adjust, and investor risk appetite has been under pressure, with insufficient willingness to trade.

He analyzed that, from a macro perspective, some recently released financial and economic data indicate that compared to the first quarter, there are signs of a marginal slowdown in economic prosperity, and structurally it is characterized by strong supply over demand and domestic demand slower than external demand. After significant policy adjustments, although the real estate market has shown some positive changes recently, the overall prosperity is still weak, and the growth rate of real estate development investment continues to slow down. Overseas, the intensification of global geopolitical risks, the increase in trade disputes between major economies, and the repeated expectations of interest rate cuts in the United States have also affected the global capital flow.

From the perspective of market volume, institutions believe that the current volume has not been effectively released.

Xingye Investment said that the weak market volume has led to the correction of strong stocks in the previous period and the Shanghai Composite Index breaking through important points, which also reflects that the market may have factored in more negative emotions.

However, analysts believe that there is limited downside space for the market in the future."Overall, there are no particularly significant issues with the fundamentals at present; the sentiment needs further repair, and the policy is entering a phase where its effects become apparent," believes Zhang Yufeng.

Xingye Investment suggests that before more positive signals emerge, the market will remain structural, with a focus on the subsequent recovery rate of the domestic economy, the decline in overseas inflation, changes in global liquidity, and shifts in industry cycles.

"Considering the current policy and capital situation, the room for the stock market to decline is limited," Xingye Investment stated.

In terms of industry allocation, CICC recommends focusing on high-dividend sectors with stable fundamentals, dividend capabilities, and willingness, as well as areas where industry expectations are likely to improve and have higher performance elasticity, such as electronic semiconductors and new energy sectors like lithium batteries.

After several rounds of adjustments, confidence in micro-cap stocks has gradually diminished. How will the micro-cap stock market perform next?

"In the current macro environment, small-cap companies face significant challenges in overall profitability," the aforementioned quantitative fund manager believes that in the current market, the overall beta volatility of micro-cap stocks has increased, and liquidity is also weaker than before.

The aforementioned equity fund manager told First Financial that the style switch between large-cap and small-cap stocks is not something that happens overnight, but it can be affirmed that this year's market style, which is dominant, will not be as extreme as last year's bias towards micro-cap stocks. In the process of the style game between large-cap and small-cap stocks, the market style's dominant market value center will also significantly rise.

Regarding the style shift, the fund manager believes that the trend of large-cap stocks outperforming micro-cap stocks this year is becoming more and more apparent. In the medium term, the space for micro-cap stocks to achieve sustained excess returns may not be very large, and the style shift is already on the way.