As we step into 2025, the A-share market has been encountering heightened volatility due to a myriad of internal and external factorsExperts in the financial sector, however, maintain a cautiously optimistic outlook, asserting that this recent adjustment does not alter the mid-term upward trajectory of the A-share marketBuoyed by expectations of improved economic fundamentals and enhanced corporate profitability, market analysts continue to express confidence in the performance of A-shares throughout 2025.

The market's recent fluctuations can be attributed to various factorsStatistical data reveals that, as of January 8th, the Shanghai Composite Index has declined by 3.63% since the beginning of the year, while the Shenzhen Component Index has fallen by 4.51%. The ChiNext index has shown the most significant drop at 6.22%. Many in the financial industry explain that adjustments in market expectations, spurred by an economic and policy window, have significantly impacted investor sentiment

This shift has been compounded by increasing external uncertainties that have suppressed market risk appetite.

According to estimates from CITIC Construction Investment, the market appears to be facing short-term risks stemming from various factors such as micro liquidity issues, fluctuations in exchange rates, a policy vacuum, performance forecasts, and external uncertaintiesAs these expectations create turbulence, a rising sentiment for risk aversion has become apparentThey indicate that the current market’s policy expectations, liquidity environment, and fundamental trends are indeed healthier compared to those observed at the beginning of 2024. Furthermore, the trading volume from small-cap stocks has yet to reach the levels seen in early 2024.

From the perspective of Zhongtai Securities, January is traditionally viewed as a critical period for economic and policy evaluation

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Historical data demonstrates a noticeable decline in the win rates and odds for the CSI 300 index compared to the previous month, emphasizing a need for the market to reconcile its policy expectation discrepancies through adjustmentsThey further added that the recent correction of small-cap stocks stems largely from valuations in specific sectors reaching historically high levels, along with stricter regulatory conditions.

Shenwan Hongyuan Securities has noted that since mid-December 2024, the market has entered a phase characterized by a contraction in profitability, with trading volumes of speculative capital showing a delayed downturn, thereby expediting short-term adjustmentsMarket expectations have indeed been lowered, with the pricing of external uncertainties impacting investors' willingness to increase their stakes in the market, a trend likely to persist into late January 2025.

Further statistics illustrate a decline in the scale of margin trading, with financing and securities returning to 1.83 trillion CNY as of January 7, 2025, down from 1.88 trillion CNY on December 30, 2024. The share of margin transactions relative to total A-share transaction volume has also decreased, falling from 10.19% to 8.59%. Net buying figures during the transition period from December 31, 2024, to January 6, 2025, indicate negative trends, showcasing a retreat of leveraged trading, with net values being reported at -15.56 billion CNY and -7.02 billion CNY respectively.

Despite these short-term adjustments, analysts affirm that the long-term outlook for the Chinese economy remains positive and continues to serve as a strong support for A-share market advancements

Statistics from the National Bureau of Statistics' Service Industry Investigation Center and the China Logistics and Purchasing Federation reveal that the manufacturing Purchasing Managers' Index (PMI) stood at 50.1% in December 2024, experiencing a slight decline compared to the previous monthIn contrast, the non-manufacturing business activity index and the comprehensive PMI output index both increased, reinforcing the notion of an expanding economic landscape in China.

Notably, national revenues for large-scale industrial enterprises in November 2024 saw a year-on-year rise of 0.5%, marking two consecutive months of recoveryHowever, profits for these enterprises fell by 7.3% year-on-year, albeit at a reduced rate from the previous monthThus, while it is true that profits remain down, the narrowing of loss margins indicates an improving landscape for corporate effectivenessThis gradual increase in the gross profit margin signifies a long-term gain, fueled by an ongoing combination of favorable policies.

Yu Bo, Chief Macro Analyst from Changjiang Securities, posits that positive forces within the economic sphere are beginning to materialize

Following a shift towards proactive policies since late September 2024, signs of economic recovery have been evident, as indicated by steady growth in industrial value added and an uptick in service sector production ratesFurthermore, manufacturing PMI sustained growth from October to December—the longest uninterrupted expansion period since early 2023—bears testament to positive sentiment among industries.

Moreover, Yan Xiang, Chief Economist at Huafu Securities, highlights that the Chinese economy in 2024 has seen continued reforms, strengthening domestic demand, and optimizing its economic structure towards high-quality developmentThe nation is expected to witness more robust growth prospects in 2025, driven by resilient overall growth, rapid establishment of advanced production capacities, and strategic transitions within industriesThe stronger foundation is anticipated to position the real estate sector for a stabilization and upward trend.

In the wake of these developments, companies such as China Merchants Securities forecast a rebound in A-share earnings due to the influence of a low base and the cyclical nature of profits

They predict substantial improvements in earnings by the end of 2024 and into 2025, given that the profit cycle typically spans three to four years with a downturn lasting approximately two to two and a half yearsThe ongoing earnings decline since hitting their peak in 2021 shows signs of waning, suggesting a potential rebound as internal demand rises, inventories are replenished, and profit margins slowly recover.

Amid these surroundings, many financial institutions maintain an overall optimistic view towards the A-share market's medium to long-term trajectoryYang Delong, Chief Economist of Qianhai Kaiyuan Fund, explains that despite the current low valuation, the earlier decline creates a solid foundation for upward trends throughout the yearHe advises investors to focus on quality assets and remain patient, emphasizing the importance of fundamental analysis over reactive trading strategies

He adds that due to shifting perspectives on the real estate market, the capital market is poised to become a primary avenue for wealth transformation and income generation for the populace in the long run.

Research from Great Wall Securities indicates a favorable environment exists for improvements in A-share valuations and risk appetites due to clear policy supports and more optimistic expectations regarding fundamentalsSince September 24, 2024, trading volumes across the board have displayed a significant upward trend, reflecting an ongoing positive effect from fiscal measures despite marginal corrections following their peakAs policy strategies crystallize, the role of capital markets is expected to become increasingly prominent.

In the view of Oriental Securities, the low valuation levels of the Chinese stock market, coupled with favorable liquidity and supportive policies aimed at economic recovery, effectively underpin subsequent upward trends

Furthermore, the emphasis on capital market reforms facilitates structural transformations, enabling long-term growthAs the effects of implemented policies are gradually realized and investor confidence is restored, 2025 is anticipated to usher in a new phase in capital market development alongside myriad investment opportunities.

In summary, the gathering advantages within the A-share market—reflected in macroeconomic indicators such as PMI and industrial value-added—alongside effective policy implementation signal an increasingly positive environmentMarket valuations currently hover around 13 times for the CSI 300 index’s trailing twelve months (TTM) earnings, suggesting room for growthThe shift in policy directing value management capabilities for listed companies stands poised to yield positive impacts on sustainable market progression and fortify gains in shareholder returns moving forward.