Bullish Market Trend Persists

December 3, 2024

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The recent fluctuations in both the A-share and Hong Kong stock markets have left many investors feeling uncertain about future trends. Since September 24, however, a series of upward oscillations in the market signals that the recent downward adjustments may serve a greater purpose—not just to search for a lower limit but to build momentum towards new heights. This intriguing perspective stems from the observation that, while the markets are undergoing short-term corrections, they also seem to engage in necessary technical adjustments that enhance traders' confidence.

A key factor in the ongoing appeal of the A-share market is its remarkable level of activity. Despite short-term volatility, engagement levels remain high, as evidenced by last Friday's trading: 920 stocks recorded upward movements, with approximately 100 hitting their upper daily limit. Such vibrancy in activity provides ample trading opportunities and avenues for profit, which can rejuvenate investors' interest even in tumultuous times.

The complex nature of financial markets means that short-term declines often reflect substantial emotional responses among investors. Events such as unforeseen geopolitical tensions, erratic macroeconomic data, or adverse news within specific industries can lead to violent fluctuations in investor sentiment. This, in turn, triggers sell-offs, resulting in rapid downturns in stock prices. A historical precedent for this phenomenon can be found during times of political unrest; investors, fearing the potential consequences of war on global economic growth, often panic and liquidate their positions, leading to a sharp decline in market confidence.

Nevertheless, it is crucial to recognize that these emotional sell-offs do not inevitably dismantle the overarching bullish pattern of the market. Rather, they reflect a normal self-regulatory mechanism within market dynamics, aimed at digesting risks accumulated during previous upward trends and addressing structural vulnerabilities that may have surfaced during periods of rapid expansion. Consider the analogy of a sprinter—after achieving a burst of speed, the athlete must decelerate momentarily to catch their breath and relax their muscles, thereby conserving energy for subsequent distances. Similarly, the market may have experienced heightened asset prices, inflated valuations, and overly optimistic investor behaviors during its upward trajectory, and a correction serves to recalibrate these discrepancies through adjustments in pricing and resource allocation, nudging the market back onto a healthier, more rational trajectory.

In maintaining a bullish market structure, the steady growth of passive funds has played an undeniably critical role. These funds typically mirror specific indices, such as the CSI 300 or the S&P 500, and tend to maintain a relatively stable holding structure closely aligned with the index components. This intrinsic stability equips passive funds with a distinct advantage during market fluctuations, rendering them less susceptible to emotional upheavals. In contrast, actively managed funds might adjust their portfolios frequently, influenced by differing assessments from fund managers or the pressures of redemptions, which can sometimes exacerbate market volatility. Passive funds, however, adhere strictly to their index composition, maintaining allocations irrespective of short-term sentiment changes. For instance, during market downturns, passive funds continue to hold their portfolio according to the weightings of the index's constituent stocks, thus providing robust bottom support for the market and helping to stabilize conditions, ultimately preventing a descent into excessive panic and chaotic sell-offs.

This stabilizing influence resembles a steady anchor amidst turbulent waves, preserving the foundational stability of the market and allowing for the continuity of a bullish outlook. Consequently, after experiencing short-term adjustments, there remains a significant probability that the market will regain upward momentum and persevere along a bullish trajectory.

Amidst this backdrop, the CSI A500 index emerges as an attractive candidate for investors looking to enter the A-share market. This particular index is composed of 500 large-cap stocks selected from various industries, emphasizing those with substantial market value and liquidity. Its design aims to reflect the comprehensive performance of multiple sectors within the A-share market. The index not only integrates traditional sectors like finance and real estate but also emphasizes emerging industries such as information technology and healthcare, thus achieving a commendable balance across sectors.

From a portfolio construction angle, the CSI A500 index boasts stocks that meet high standards of investability and industry leadership. The sample stocks captured in this index represent 53% of the free-float market capitalization and 36% of the total trading volume within the A-share market, thereby providing a thorough and accurate portrayal of leading companies across various industries. This comprehensive approach allows the CSI A500 index to offer a wide range of investment opportunities and risk diversification strategies for investors.

Furthermore, the CSI A500 index incorporates ESG (Environmental, Social, and Governance) criteria during its selection process, which helps mitigate the risk of significant negative events in sample companies. This strategic integration fosters better medium- and long-term capital allocations.

For those interested in establishing a position in the A-share market, paying attention to the A500 index ETF (560610) is highly advisable. Functioning as a passive index investment tool that tracks the A500 index, this ETF not only benefits from low expense ratios (with a management fee of 0.15% and a custody fee of 0.05%) but also features an innovative dividend mechanism. If the ETF's excess return over the underlying index exceeds 0.01% on the last trading day of each quarter, mandatory dividends are declared, distributing at least 80% of the excess return. This structure is designed to cater to investors' cash flow needs, enhance return expectations, and improve the overall investment experience.

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