WE Think: Will Actively Managed Equity Funds Embrace a Spring in 2026?

China’s equity market saw moderate corrections in November. The CSI 300 Index declined 2.46%, the Wind All A-Share Index dropped 2.22%, while small-cap indices—represented by the ChiNext Index (down 4.23%) and the STAR 50 Index (down 6.24%)—adjusted more sharply. After the October rally and November pullback, many investors gave back part of their 2024 gains, with those misjudging trading timing even recording losses.

However, focusing solely on the past two months overlooks the broader picture: from May to September, China’s stock market rallied continuously for five months. Without appropriate adjustments, unchecked upward momentum could “overcook” the market—akin to burning food by cooking too intensely. China’s economic and bull market journey is long-term; sprinting at full speed may be an appealing vision for wealth-seekers, but it contradicts both market fundamentals and regulators’ goal of fostering a steady, long-term bull market.

As December 2025 approaches, it’s timely to outline preliminary investment ideas for 2026. This edition of WE Think explores potential market directions for next year, grounded in recent adjustments.

Rest to Walk Farther: Avoiding Uniform Market Expectations   

Across multiple bull-bear cycles, the most perilous phase in markets is the emergence of uniform expectations. If a bullish consensus forms, sellers hesitate to offload holdings while buyers struggle to find counterparties, leading to accelerated—or even frenzied—market surges. We witnessed this vividly in the first half of 2015, with well-known subsequent outcomes.

Since this bull cycle began, Chinese regulators (regulatory authorities overseeing capital markets) have demonstrated exceptional macro-control capabilities, stabilizing the market bidirectionally with precise timing, appropriate intensity, and well-measured interventions. In early October 2024, amid widespread media hype about an impending “super bull market,” a surge of retail investors rushed into the market out of fear of missing out. Regulators promptly tempered upward momentum, keeping the market range-bound for seven months (October 2024–April 2025) without new highs. When Sino-US trade frictions triggered panic selling in early April 2025, markets stabilized rapidly—while overseas peers remained volatile, China’s stock market resumed its upward trend. From April to September 2025, a five-month rally pushed major A-share indices to new highs since the September 2024 uptick.

This year-plus trajectory highlights the resilience and maturity of China’s capital markets. Compared to historical sharp swings, recent market performance has been steadier, significantly improving the holding experience for both retail and institutional investors. Stable market conditions are vital for fostering long‑term and value investment principles—minimizing extreme volatility is key; without extreme volatility, identifying hundreds of high-quality or high-momentum companies among 5,000 A-share listed firms to capture alpha remains feasible.

Will Actively Managed Equity Funds Thrive in 2026?   

In 2025, quantitative products outperformed, attracting significant capital inflows, while most fundamentally managed active funds faced net redemptions. Our internal quantitative analysis reveals that small- and mid-cap factors delivered notably strong excess returns this year. These high-valuation small-cap stocks, however, significantly underperformed large-cap blue chips during the 2019–2021 structural bull market and lagged behind large-cap value stocks in early 2023–2024. Years of experience teach us: no investment strategy remains universally effective—each excels only in specific phases.

The table below presents statistics from our quant team on the 10-year style rotation of size (large vs. small caps) and growth vs. value factors: 

Since September 2024, market styles have shifted markedly. Large-cap value, previously the top performer, has become the weakest, while small-cap growth has taken the lead. Year-to-date, market performance shows a clear negative correlation with company size. Small- and mid-cap A-share firms have collectively delivered notable excess returns. Whether this trend continues in 2026 remains debated. 

This shift is understandable. Post-“924” (September 24, 2024, when the market turned from bear to bull—though views differ, we adopt this interpretation), the first bull phase was driven by valuation reversion after oversold conditions. Historically, in such early-stage reversion, small-cap firms (which suffered deeper declines in the bear market) exhibit higher elasticity than blue chips or resilient large caps—a logical dynamic. Actively managed funds typically avoid fundamentally weak small caps, but quant strategies excel at basket-trading them. Thus, 2025’s outperformance by quant products—geared to trading gains—was unsurprising, amplified by continuous capital inflows creating positive feedback loops. 

Looking ahead to 2026, after over a year of valuation recovery from oversold to reasonable levels, what will drive further gains? While many hope for continued broad-based valuation expansion, we believe this scenario is less likely. A more plausible path is stable overall valuations, with structural bull runs driven by earnings growth in high-quality companies and those in high-momentum sectors. Reliance on valuation expansion to sustain rallies could undermine the goal of a steady, long-term bull market. 

Consequently, actively managed equity funds with deep fundamental research capabilities—skilled at uncovering growth stocks and identifying high-momentum sectors—are well-positioned to deliver superior excess returns in 2026.

Recent Market Developments & Investment Strategy   

Amid significant volatility in US markets, China’s capital markets have maintained remarkable stability. Macroeconomic data indicates that both loose monetary policy and proactive fiscal measures still require further reinforcement, limiting downside risks. However, after the first phase of valuation repair, the market needs appropriate consolidation—“rest is necessary to walk a longer path.” In a bull market, forcing premature acceleration is counterproductive—it’s like “pulling up seedlings to help them grow,” which only leads to failure.

Our portfolio remains at a moderately aggressive level. We are confident in the current stockholding structure and will focus on timely fine-tuning and optimization.

Wu Weizhi   

29-November-2025

Executive Summary: China Equity Market Outlook 2026

Market Performance & Behavior

· Recent Corrections: In November 2025, the CSI 300 fell 2.46%, Wind All A-Share declined 2.22%, while small-cap indices (ChiNext –4.23%, STAR 50 –6.24%) corrected more sharply.

· Broader Context: Despite short-term pullbacks, the market rallied for five consecutive months (May–September 2025). Regulators actively managed momentum, preventing overheating and stabilizing volatility.

· Investor Dynamics: Retail investors surged into the market during October 2024’s “super bull” hype, but regulators contained excesses. This bidirectional control has produced steadier performance compared with past cycles, improving investor holding experience.

Style Rotation & Fund Flows

· Quantitative Outperformance: In 2025, quant products attracted strong inflows, while many fundamentally managed active funds faced redemptions.

· Factor Trends: Small- and mid-cap growth stocks delivered notable excess returns, reversing the dominance of large-cap value seen in 2019–2024. Market performance has shown a clear negative correlation with company size since September 2024.

· Historical Insight: Early-stage bull phases often favor small caps due to higher elasticity after deep bear-market declines. Quant strategies excel at basket-trading these names, amplifying gains through capital inflows.

Outlook for 2026

· Valuation Recovery: After more than a year of valuation repair, broad-based expansion is less likely. Stable overall valuations are expected, with structural bull runs driven by earnings growth in high-quality and high-momentum sectors.

· Active Fund Opportunity: Reliance on valuation expansion alone risks undermining long-term stability. Actively managed equity funds with strong fundamental research are well-positioned to identify growth companies and momentum sectors, delivering superior excess returns in 2026.

Investment Strategy

· Portfolio Positioning: We maintain a moderately aggressive stance, confident in current holdings.

· Approach: Focus remains on fine-tuning and optimizing stock selection, emphasizing companies with sustainable earnings growth and sectoral momentum.

· Philosophy: “Rest to walk farther”—appropriate consolidation is essential. Forcing premature acceleration risks destabilizing the bull market, whereas steady progress supports long-term value creation.

本期《偉志思考》簡體中文版鏈接：

伟志思考：主观选股型基金2026年能否迎来春天？