Recent fluctuations in global markets have raised eyebrows as the risk appetite appears to be waning. While international capital markets slide into adjustments, China's capital markets are reflecting a similar trend, especially notable in the movements of government bonds and equities which lately have exhibited a "seesaw effect". This situation brings into question not only the confidence of investors but also the broader economic indicators that typically guide them.

The primary cause behind the declining risk appetite overseas has been attributed to the tempered expectations regarding the pace at which the Federal Reserve will cut interest rates. As the world economy is at a standstill, the ramifications ripple back into domestic markets. Specifically, Chinese equities appear to be struggling amidst considerable uncertainty—indicating that investors are not fully convinced of the stability of the market.

In recent weeks, investors have found themselves in a sort of data vacuum pertaining to macroeconomic indicators, which has likely exacerbated feelings of insecurity regarding the economy's recovery. As the A-share market experienced robust performance from October through November, it seems a necessary pause has emerged—allowing room for adjustments. Such fluctuations are entirely expected within the dynamics of a bull market. Instead of signaling despair, such moments may present strategic opportunities for positioning themselves favorably in anticipation of the robust market anticipated in 2025.

A glance at leading economic indicators, such as the Manufacturing Purchasing Managers' Index (PMI), suggests resilience moving into 2024. Specifically, a reading of 50.1% in December shows the index remains in the growth zone for three consecutive months. This figure hints at persistent economic momentum, suggesting the broader economic recovery observed since September is still alive and kicking.

From a policy perspective, it’s notable that a more proactive macroeconomic approach is being adopted. On January 3, during a press conference, officials indicated a significant increase in the scale of special long-term treasury bonds, aiming to bolster the implementation of pivotal "two-heavy" and "two-new" policies. This proactive fiscal policy is anticipated to play a crucial role in stabilizing investments and promoting consumption throughout 2024 and beyond.

In terms of monetary policy, recent discussions have revolved around encouraging financial institutions to ramp up credit provision. Data from the first eleven months of 2024 revealed a contraction in new Renminbi lending year-on-year; however, projections for 2025 anticipate a return to positive growth. With the onset of the first quarter representing a "good start" for credit, strong policy support aims to set a conducive atmosphere for economic growth in the upcoming year. Furthermore, recent comments from the central bank suggested readiness to adjust interest rates downward as appropriate, indicating that further easing in monetary policy is on the agenda, strategically awaiting the right moment for implementation.

Another layer of concern arises from the rapid decline in treasury yields, which could initially provoke caution within equity markets. However, empirical analysis typically suggests that a drop in bond yields does not inherently precipitate downturns in stock markets. In fact, lower yields could enhance stock market valuations, presenting a dual benefit of reduced risk-free rates boosting investor sentiment. Nevertheless, the complete picture is often muddled by various other influencing factors, making the overall market response somewhat unpredictable.

During the initial phases of declining interest rates, we frequently observe this seesaw dynamic between stocks and bonds. This phenomenon emerges from the fact that polices are gradually exerting influence on the economic landscape, where tangible improvements in corporate earnings may lag, thus feeding into investor hesitance. Yet, as we transition into the latter stages of falling interest rates, policies begin to bear fruit, bolstering economic fundamentals. This phase is generally characterized by stronger stock performance supported by improved profit margins while bond yields could start to trend upwards again.

Looking ahead, investors are encouraged to maintain a long-term perspective. The bottom of the A-share market was observed to have passed in September 2024. While the road to recovery may still prompt market fluctuations, the ongoing enhancements in pro-growth policies will likely foster improvements in corporate earnings over time. Thus, worries surrounding the broader performance of A-shares in the context of 2025 should be regarded with tempered caution, as current adjustments could also provide prime entry points for investment.

Typically, the months of January and February represent a quieter macroeconomic landscape with less data to analyze, while March marks a significant policy window as the National People's Congress convenes. The government's work report unveiled during this session will clarify China's primary economic targets for 2025, including potential increases in fiscal deficits and further emissions of special treasury bonds. These announcements will set the tone for A-share performance, as they provide substantial renewed opportunities for investors to capitalize on emerging trends.