Although the Shanghai Composite Index broke through 3,400 points this week to set a new high, those in the stock market understand that this money is hard to earn. "Buying at 3,000 points and getting stuck at 3,400" is not a joke.

The bull market in core assets in 2020 and 2021 taught us value investing, and the "new semiconductor military" bull market in 2021 taught us to invest based on business prosperity. This year, it has taught us to chase gains and cut losses. In the past, we at least talked about fundamentals and business prosperity, but this year it's all about grand narratives, capital, and emotions. Capital is the rationale, and rising prices are the rationale. If you don't chase, it will keep rising until you do; if you don't cut your losses, it will keep falling until you are forced to.

Speculation is about selling to those who believe later. Apart from core stocks, many others fall and never recover. Here we see many retail investors who can't resist the temptation to buy heavily at high positions, and then a limit down leads to significant losses. If there is a discipline of stopping losses, it's just a matter of learning from experience. But if they blindly buy more to average down, they get trapped.

Advertisement

Not only are retail investors losing money, but public funds are also struggling this year. According to data from Tiantian Fund, out of 7,210 mixed funds this year, only 3,552 have positive returns, with a ratio of 49.26%, and the median is -0.07%. This means that more than half of the mixed funds are in the red this year.

Looking further, the Shanghai Composite Index has risen by 7.44% year-to-date, the CSI 300 has risen by 3.23%, the ordinary stock fund index has fallen by 0.50%, and the stock-biased mixed fund index has fallen by 2.18%. It can be seen that ordinary stock funds and stock-biased mixed funds are both losing money this year, significantly underperforming the Shanghai Composite Index.

This is completely different from the bull market everyone was shouting about at the beginning of the year. The index has risen in vain. So why are public funds so bleak this year? The main reason is that the A-shares that have risen are industries that public funds have lightly invested in, while the industries that public funds have heavily invested in, such as consumer goods, pharmaceuticals, and new energy, are all falling.

According to the public fund holdings data for Q4 of 2022, the top three heavily invested industries are food and beverages, power equipment, and pharmaceuticals and biotechnology, accounting for 15.5%, 15.20%, and 11.58% respectively, with just these three industries accounting for more than 42%.

Then let's look at the top five leading industries in the SWS first-level industry this year, with media up 51.04%, communications up 27.57%, computers up 26.75%, construction decoration up 21.50%, and petroleum and petrochemicals up 13.81%. The leading gains are mainly driven by artificial intelligence in the TMT sector and by the special valuation of Chinese enterprises in the "China" sector.

Correspondingly, let's find the proportion of these leading industries in public fund holdings, which is no more than 10% in total. Therefore, even if these industries rise sharply, they cannot contribute much net value to public funds.How could it be such a coincidence, does the market specifically target the rise of public funds with light positions? Although it sounds a bit conspiratorial, the A-share market this year indeed seems to be hunting public mutual funds. Setting aside the catalysts of Chatgpt and China-specific valuations, the structure of the chips is the focus of the game.

Due to the relatively low new fund issuance this year, and the high positions of public funds last year, there is little incremental capital for public funds this year, relying on others to carry the load. Other funds are not foolish; how could they carry the load for public funds? They would avoid sectors heavily invested in by public funds and instead pull up sectors with light positions in public funds, which can force public funds to cut positions to buy in. This leads to an extreme market style, with AI and China-specific valuations siphoning off funds from consumer goods, pharmaceuticals, and new energy.

Of course, the most fundamental reason is still the weak economic recovery, with issues in the logic of consumer goods, pharmaceuticals, and new energy, which has fueled the flames of speculative topics.

In the end, investors who are still stuck in consumer goods, pharmaceuticals, and new energy funds need not worry. These industries all have medium to long-term growth potential, and their current valuations are relatively low. Although the current economic recovery is weak, as residents' incomes rise and confidence is restored, demand will eventually pick up, and market styles will return.

Everyone is envious of the gains in the gaming industry this year, but the gaming industry has been dormant for three years. So, what we need to do now is to hold on, not blindly chase high, even if we are optimistic about artificial intelligence and China-specific valuations, it is best to wait for a pullback, and not get on the market when it is in a frenzy.