ChinaAMC has identified two signals to determine if the A-share market has stabilized: first, if trading volume shrinks to below 1.7 trillion yuan, indicating selling pressure is exhausted; second, if broad-based ETFs see significant capital inflows, suggesting large funds are stepping in to provide support.
On March 23, A-shares experienced a "Black Monday," with several major indices posting significant declines. The Shanghai Composite Index fell 3.63% to close at 3813.28 points, the Shenzhen Component Index dropped 3.76% to 13345.51 points, and the ChiNext Index declined 3.49% to 3235.22 points. Combined turnover for the Shanghai, Shenzhen, and Beijing exchanges exceeded 2.4 trillion yuan, an increase of over 150 billion yuan from the previous trading session.
More than 5,000 stocks declined across the market, with 29 out of the 31 primary Shenwan industry indices falling. Only the coal and petroleum & petrochemical sectors managed gains against the trend. The social services, beauty & personal care, agriculture, forestry, animal husbandry & fishery, textiles & apparel, and electronics sectors were among the worst performers.
Additionally, the Hong Kong stock market also suffered heavy losses today. The Hang Seng Index fell 3.54%, while the Hang Seng Tech Index dropped 3.28%. Sectors such as raw materials, financials, and healthcare saw declines exceeding 4%.
China Merchants Fund indicated that the recent sustained decline in A-shares and Hong Kong stocks, coupled with the breach of key psychological levels, has led to a concentrated release of risk-averse sentiment, accelerating the market adjustment. Looking ahead, geopolitical risks remain highly uncertain and are expected to significantly suppress market risk appetite. However, considering that the current liquidity shock has become quite extreme, A-shares and Hong Kong stocks, supported by China's stable domestic economic environment, may present good low-level allocation opportunities once the Middle East conflict eases and market sentiment stabilizes.
**Correction of "Short-Term Conflict" Expectations**
ChinaAMC's analysis suggests that this adjustment essentially represents a market correction to the previous expectation that "geopolitical conflicts would be short-term." Previously, the market largely viewed the Middle East conflict as a temporary disruption and built oil price and inflation models accordingly.
However, the conflict involving the US, Israel, and Iran, now in its fourth week, shows signs of escalation. On the evening of March 21, the US President stated via social media that Iran must open the Strait of Hormuz within 48 hours or face strikes on its power infrastructure. Iran responded strongly, threatening four "punitive" measures, including a potential full closure of the Strait of Hormuz.
Xia Fengguang, a fund manager at Rongzhi Investment, noted, "Investors are gradually realizing that the situation is unlikely to be resolved quickly. This will significantly boost global inflation expectations, thereby interfering with the path of monetary policy."
This interference was already evident in the latest Federal Reserve policy meeting. Last week, the Fed held rates steady, but the dot plot showed moderated expectations for rate cuts. The projected year-end policy rate bottom was raised from 2.0% to 2.5%, leading to expectations of tighter global liquidity.
Bao Xiaohui, Chairman of Changli Asset, explained the path through which shifting liquidity expectations suppress valuations: "Previously, the market widely anticipated a global rate-cutting cycle, with lower funding costs supporting asset valuations. But now, with rising inflation pressures, the market is starting to worry not only about the absence of rate cuts but also the potential for a return to a rate-hiking cycle. The shift in monetary policy expectations from easing to tightening means rising funding costs directly pressure stock market valuations, causing panic to spread rapidly and leading to a negative feedback loop as investors rush for the exits."
Bao Xiaohui added that factors such as concentrated profit-taking and technical breakdowns triggering quantitative stop-loss orders amplified the declines. Furthermore, the synchronized downturn in global markets forced some foreign investors to sell holdings to alleviate liquidity pressures at home. "The combined exodus of domestic and foreign capital, coupled with insufficient buying power in a market dominated by existing players, resulted in a sharp market adjustment," he said.
**A Pause Within a Bull Market**
With the Shanghai Composite Index successively breaching the 4000-point and 3900-point levels and testing the 3800-point mark, market anxiety has intensified.
Bao Xiaohui believes this round of decline is essentially a corrective pause within a bull market. Historically, interim corrections of 20% to 30% during bull markets are normal. Even a pullback to around 3500 points from the recent highs would fall within a reasonable fluctuation range.
"The issue is that this correction has been too rapid and forceful, making it difficult for investors to adapt and creating the illusion that the bull market has ended," he stated.
Noah Fund expressed the view that the current volatility is driven solely by sentiment regarding capital flows and does not represent a fundamental, trend-driven weakening. They suggested that market sentiment may have reached an extreme point today, and the momentum for indiscriminate selling in the short term is likely to weaken. Furthermore, this adjustment has, for the first time, seen panic selling reflected in the derivatives market, which "could be an important signal that sentiment is nearing a short-term low."
**Focus on Volume and Broad-Based ETFs**
What should retail investors do in such an uncertain market?
Bao Xiaohui advises that the most crucial thing for retail investors now is to maintain composure and not let panic dictate their actions. Overall strategy should prioritize stability: control position sizes, avoid frequent trading, and perhaps even step away from the screen temporarily to avoid having judgment clouded by short-term fluctuations.
"The nature of this sharp decline is also a market cleansing, digesting weak holdings and negative news. Once the panic selling subsides, the market will naturally stabilize and gradually recover," he said.
ChinaAMC reiterates the two signals for judging A-share stabilization: shrinking trading volume below 1.7 trillion yuan indicates exhausted selling pressure, while significant inflows into broad-based ETFs suggest large funds are providing support.
Regarding the gold market, which many investors are watching, Ye Peipei, a fund manager at ZhongOu Fund, believes the recent significant sell-off in gold was primarily due to liquidity concerns and rising expectations of interest rate hikes. However, if energy prices remain high and the Federal Reserve turns more dovish, gold's role as an inflation hedge could come back into focus.
She believes that if geopolitical conflicts ease, gold prices would benefit directly. If conflicts escalate further, leading to surging oil prices and stagflation risks, global interest rate hikes would face constraints like fiscal unsustainability. In such a scenario, the inflation rate could outpace the rate hike trajectory, thereby providing support for gold prices.
Noah Fund maintains that short-term sentiment fluctuations do not alter the two primary drivers for A-shares: "earnings recovery" and "the implementation of technological industrialization." While a high-interest-rate environment pressures highly-valued stocks, tech leaders with stable cash flows and strong pricing power remain relatively resilient.
From the perspective of Xiangju Capital, in the short term, rising risk aversion in global financial markets and contracting liquidity will inevitably put pressure on asset prices. However, from a medium to long-term view, thanks to the foresight of China's energy security strategy, significant achievements in diversification and renewable energy substitution have built a solid barrier against external shocks. Coupled with supply chain advantages and continuously improving fundamental stability, the long-term upward trajectory for Chinese assets remains unchanged.
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