The advent of a new year often brings reflections and projections, particularly in the world of stock marketsAs we step into 2025, it is apparent that the A-share market in China has embarked on a tumultuous start, with recent developments triggering noticeable declinesOver two successive days, the market breached previous consolidation levels, primarily led by growth-centric stocksWithin this context, the performances of indices such as the ChiNext and the ChiNext 50 have raised eyebrows, alongside the previously dominant dividend assets which have also succumbed to mounting pressureSo, what might be driving this disconcerting downtrend?

One prominent factor is the phenomenon of mean reversion, a statistical concept often observed in financeWhen reviewing the performance of major equity indices from 2024, it becomes glaringly evident that, while each major index enjoyed an uptick of over 10%, the median decline among individual stocks hovered close to 5%. This subtle yet crucial discrepancy signals a return to overall market averages—a process where high-performing stocks experience corrections while underperformers gradually begin to recover.

The recent downturn reveals that the primary contributors to market losses are the heavyweight stocks rather than the smaller cap equities that typically exhibit more volatility, especially in bullish climatesIn fact, prior top performers such as the ChiNext 50 have emerged as the most affected, while sectors like securities, TMT (technology, media, telecommunications), and semiconductors—previously subject to significant appreciation—are also leading the declinesThis scenario highlights a collective recalibration within the market as it begins to stabilize post the dynamic swings of the previous year.

Moreover, this mean reversion reflects shifting risk appetites among investors, which tend to fluctuate cyclicallySince September 2024, expectations surrounding policy changes and rapid market valuation corrections led to a robust preference for riskier assets

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Investors were energized by profitable trends, triggering heightened enthusiasm and trading activityHowever, from mid-December, a clear downtrend in risk appetite has manifested, supported by our previous mentions of theme trading turning a corner and a gradual cooling of trading energy across both major exchanges.

In analyzing the current market landscape, it’s clear that the timing of events plays a pivotal roleAmong the significant upcoming occurrences are the transitions stemming from the inauguration of a new U.SPresident in late January, potentially involving tight monetary policies and tariff adjustments, as well as a historically notable calendar effect which often favors large-cap value stocks in JanuarySuch variables predominantly promote a risk-averse sentiment within the marketAs momentum shifted and investors opted for a more cautious approach, eyeing shelter from volatility led to intensified sell-offs following Tuesday’s dip.

So how should one navigate this complex maze that is the stock market? The omnipresent challenge lies in discerning the implications of observed patterns accuratelyA good standard for determining the precision of an attribution analysis is its predictive power—can current causes reliably forecast outcomes? Based on the two pressing factors constraining risk appetite in the recent market climate, our previous guidance urging a blend of defensive and opportunistic tactics—the “defensive counterattack”—holds significant meritReiterating from recent strategies, we predicted that once thematic trading indicates a peak, market activity would likely wane while investor risk tolerance dwindles, steering into periods of poor performance.

Looking ahead, analysis suggests that we currently find ourselves in a sharp downtrend regarding risk appetiteThe momentum toward growth stocks has significantly diminished, and even traditionally resilient dividend stocks are now grappling with corresponding sell pressures

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