The short-term style of small-cap market driven by capital and valuation factors is expected to continue.

China Fund News reporter Sun Xiaohui Zhang Yan North

Since the beginning of this exclusive informationyear, the market of micro-disk stocks has been sturm und drang, which has aroused widespread concern in the market. In particular, the wonder microdisk index rose by over 49% during the year, which led to the bright returns of funds adopting the small market value factor strategy.

A number of fund managers interviewed said that since the beginning of this year, funds have flowed to small-cap stocks to hedge, the quality of enterprises with small-cap stocks has improved, the value has begun to be reasonably revalued, and the two forces have superimposed, and micro-cap stocks have performed strongly. Compared with the past, the foundation of this round of market is more solid. From the perspective of style cycle, the market of micro-disk stocks may still be worthy of attention in the short term, but we should always be alert to the risk of style reversal.

Re-evaluation of superimposed valuation of capital inflow

Drive a small market value

Talking about the main logic of micro-disk stocks going bullish this year, the fund managers interviewed believe that this year's capital inflow has superimposed the quality improvement of related enterprises, driving the small market value. Compared with the past, the foundation of this round of market is more solid.

Wang Huaixun, fund manager of the Oriental Quantitative Growth Flexible Allocation Hybrid Fund, said that on the one hand, domestic and foreign institutional investors generally experienced capital outflows this year, and the large market value and high-prosperity stocks with heavy institutional positions were heavily sold, and funds began to flow to small market value to hedge; On the other hand, in the market of small-cap stocks from 2016 to 2020, the value of shell resources depreciated sharply, and the valuation dropped significantly. In addition, with the implementation of the registration system, some specialized and special new enterprises gradually went public, and the quality of small-cap stocks also improved, which made the value of small-cap stocks begin to be reasonably revalued. Under the superposition of the two forces, the small market value has performed strongly this year, especially the micro-disk stocks.

Qiao Peitao, deputy general manager of Founder Fubon Equity Investment Department, believes that at the industrial level, it is the embryonic stage of new technologies, and new technologies such as AI+, satellite Internet and autonomous driving are emerging one after another. Small and micro-disk companies are easy to turn around and it is easier to keep up with the new trends of the industry, so it is easier to dominate.

Compared with the past small and micro-cap stock market, Wang Huaixun believes that from 2009 to 2015, the market was also in the style of small market value, especially in the overall rising market in 2014, but the main logic was the value of shell resources. At the same time, the style of small market value at that time also showed a strong correlation with market liquidity, indicating that there were strong financial and emotional drivers behind this round of small market value style, and the rising foundation was not solid. In contrast, there is a logic of reasonable revaluation of small market value this year, and the foundation is more solid.

Jin Dalai, assistant fund manager of Golden Eagle Fund's equity research department, believes that this year's small-cap style is more of a theme investment. Under the industrial concepts such as AI and data elements, the stock price has shown violent fluctuations, but the industrial stage is actually "0-1", which cannot be realized in the profit statements of small-cap companies. This is obviously different from the style of small-cap market in the previous two years. From 2020 to 2022, with the concentrated outbreak of new energy vehicles and photovoltaic industries, with the transmission of new energy industry chain to the upper, middle and lower reaches, the stock price performance of many related small-cap companies has the performance support of profit improvement, which is not a simple theme investment.

Huang Zhigang, assistant general manager of South China Fund and general manager of Quantitative Investment Department, believes that the small-cap market in 2015 and 2021 was more driven by the explosion of emerging industries such as mobile Internet and new energy. This year, the small-cap market is more biased towards AI and other concepts.

Qiao Peitao said that the market value of this round of small and micro-cap stocks is even deeper, and the smaller the market, the greater the flexibility, and the faster the theme rotation, which is not easy to grasp.

Short-term style or sustainability

Always be alert to the risk of reversal.

Looking forward to the market outlook, the fund managers interviewed believe that the market of micro-cap stocks is expected to continue in the short to medium term, but we should always be alert to the risk of style reversal.

Huang Zhigang pointed out that the continuous rise also means the accumulation of risks. Once negative feedback is formed, the low liquidity of micro-cap stocks will further aggravate this risk.

Dong Shanqing, manager of Taixin Industry Select Hybrid Fund, bluntly said that the overall valuation of micro-disk stocks is higher than the average, but there is no very huge bubble, and the fundamentals reflect everyone's expectation for the future economic improvement. The general liquidity is not conducive to the participation of large funds. As far as segmentation is concerned, there are still good opportunities in TMT, consumption, medicine and other industries.

"At present, there is no sign of the end of the capital outflow trend of institutional heavyweight stocks. In the short term, the micro-cap stock market is still worthy of attention, but we must bear in mind that the market value factor is a style factor, not an alpha factor, and the accuracy of people's subjective judgment on the market value style is low, so we should always be alert to the risk of style reversal." Wang Huaixun reminded.

At the same time, many fund managers pointed out that in the long run, the true meaning of investment is value and valuation, not market value. Small market value is only the result of value stock selection, not the starting point of stock selection.

Wang Huaixun said that the strategy of "small-cap stocks+equal weight" to build a combination of micro-cap stocks can be regarded as a kind of Smartβ, the essence of which is to rely solely on small-cap style and earn Beta, not Alpha. This strategy may perform well when it conforms to the market style, but in the long run, the beta income is unstable and the market will reverse. If investors are optimistic about this style, they can use it as an investment tool, but they should not mistake it as an alpha strategy.

He believes that microdisk is more suitable for quantitative strategy based on quantity and price factors, but there is still a big challenge in transaction cost control, because the turnover rate of microdisk investment strategy is usually large, while the liquidity of microdisk stocks is poor and the impact cost is very high. It is necessary to have a good cost control model and be careful. It is impossible to simply "lie flat" and let go of significant trading opportunities, and it is also the core difference and competitiveness of the strategy.

Dong Shanqing also said that at present, this strategy has achieved very good results and is likely to continue, but it is also necessary to be alert to the possibility of failure when any strategy reaches its peak.

In addition, some fund managers believe that the trend of small and micro-cap stocks is easily driven by emotions and transactions, and the market efficiency is relatively weak, the liquidity is poor, and the capacity is very small. Therefore, the scale of holding small and micro-cap stocks cannot be very large, and they must be very dispersed, which is more suitable for quantitative strategy investment.

Qiao Peitao pointed out that from the past history, small and medium-sized stocks are relatively more flexible. The probability that a company with a market value of 5 billion will rise five times is much greater than that of a company with a market value of 50 billion. The surge of a company with a large market value often requires an industry outbreak. The probability is relatively small. "Small-cap stocks with equal weights are more suitable for quantifying funds, and it is difficult for active equity investors to track the performance of micro-cap stocks, which is relatively at a loss."


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