The world of small-cap stocks often presents a compelling narrative, characterized by vast potential and inherent risksThis narrative has taken a significant turn, particularly for the small micro-cap stocks in recent monthsAs of June 6, there has been a notable adjustment in the market, particularly impacting stocks valued under 5 billion yuanClose to 3,000 such stocks have seen declines, with 88 plummeting over 10% within a single dayThe Wind Micro-cap Stock Index reported a staggering fall of 6.51% on that day alone – the largest drop since mid-April of this yearUpon analyzing the trend from late May, the cumulative decline for the index over the past 14 trading days reached a troubling 19.17%.

This wave of downturns is not isolated; it is just one of several such occurrences this yearCumulatively, the index of micro-cap stocks has fallen over 30% in 2023. The situational malaise is reflected in related theme funds, where half of the active equity products have retreated by more than 10%. Exchange Traded Funds (ETFs) tracking indices like the CSI 2000 and the National Index 2000 have shown average declines of 17%, with significant asset shrinkage over the past month.

Industry experts attribute this collective downfall to a multitude of factors, including increasing uncertainty in the macroeconomic environment and waning confidence in micro-cap stocks within the market

These elements have created a perfect storm that has panicked investors, subsequently leading to withdrawal and lack of investment in these smaller stocksShould the downward trend be halted soon, the market's fear might subside; conversely, further declines could see continued drag on the overall index, suggesting a cautious approach for investors moving forward.

As market corrections unfold, indices that encapsulate the micro-cap style—like the CSI 2000 and the National 2000—have followed suitTheir declines were recorded at 11.72% and 9.44% respectively over the past 14 trading sessions, culminating in annual drops of 22.92% and 17.21%. All 18 ETFs that track these indices have mirrored this trend, with half experiencing drops exceeding 10%.

Data from Wind indicates a troubling trend: as of June 6, not a single ETF in this category has reported gains this year, with an average drop of 17%. Some of the most notable products, such as the Southern CSI 2000 ETF and others, have seen declines surpassing 20%. This performance can largely be attributed to an exodus of capital; over 500 million yuan has fled from the related ETFs in just one month, with more than half of these products suffering a reduction in shares by over 10%.

An exemplary case is the Haifutong CSI 2000 Enhanced Strategy ETF, which suffered near an 80% drop in shares recently, dwindling to fewer than 20 million

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Other ETFs like ICBC National 2000 ETF and Guotai Junan CSI 2000 have similarly reported reductions in shares of over 30%, with net asset values falling below 26 million.

The turmoil is not limited to ETFs; equity funds are similarly feeling the impactA review of funds categorized under the descriptor of 'small-cap' has revealed that as of June 5, out of 62 active equity funds tracked, over 95% have observed downturns since May 20. Among those, a few, such as Yinhua Small-Cap Selection and others, have yielded positive returns, although they have remained below 2%, while several faced steep declines of over 10%.

Following this recent period of downturn, the average return for these proactive equity funds is staggeringly low, sitting at -9.02% year-to-dateLess than 20% of the funds have managed to stay afloatNotably, top performers like the Huitianfu Strategic Selected Small-Cap have returned 23.88% since the beginning of the year, while other funds achieved over a 10% rise

In stark contrast, funds like Jinyuan Shun'an Quality Selected A have plummeted by almost 28%. Additionally, many theme funds in the Beijing Stock Exchange have also reported significant drops exceeding 28% year-to-date.

Observing the recent adjustments in small micro-cap stocks has evoked multiple interpretations from industry insidersThe prevailing sentiment suggests that the unpredictable macroeconomic environment and dwindling investor confidence have significantly contributed to the declines witnessedA fund manager from Shanghai commented on the substantial shift within the A-share market, pointing out stricter delisting criteria and increased regulatory scrutiny over dividend policies, which have intensified pressure on micro-cap stocks that lack robust operational and distribution capabilities.

This shift in market dynamics has seen a notable preference among investors for larger-cap stocks with proven dividends

Reports indicate that an array of regulatory inquiries has been directed at troubled firms, further amplifying fears of delisting among micro-cap stocksThe investor psyche has consequently adopted a more cautious stance toward these smaller entities, resulting in rapid sell-offs.

The cumulative effects of prior downturns in micro-cap stocks have variedFor instance, from January 29 to February 7, micro-cap stocks suffered severe losses, with the index dropping 41% over merely eight trading daysOn four separate occasions thereafter—each marked by regulatory directives toward stricter delisting guidelines—investors have further expressed their reservations, prompting a selling frenzy that has had lasting repercussionsRecent data shows that 15 companies were either terminated or locked for delisting throughout May, compounding these fears.

This ongoing volatility introduces a clearer bifurcation within the micro-cap realm

Despite the market advancements observed from 2021 to 2023—where micro-cap stocks grew by over 142% against a backdrop of a declining Shanghai Composite Index—such resilience may wane as broader economic uncertainties loomWhile funds previously dedicated to micro-cap investments may have fared well, many are now recalibratingPresently, there are fewer micro-cap stocks—982 valued under 5 billion yuan—down from 1,137 at the end of the previous year.

This situation leads to broader questions about the viability of investing in small micro-capsIt appears that the macroeconomic landscape will create pronounced challenges for these smaller entities; they typically represent higher risk, translating to greater volatility as they may have less liquidity than their larger peersSome fund managers suggest that while a gradual style rotation from small to large caps is not out of the question, the short-term prospects for micro-cap investment are clouded with uncertainty.

As we witness heightened scrutiny of micro-cap stocks, analysts predict a rigorous purification process will occur, separating fundamentally strong companies from their 'dead weight.' Specific focus will be applied to stocks in peril, making future investments in this segment particularly pivotal