Core Viewpoint - The article highlights the strong performance of micro-cap stocks, particularly in the context of the Shanghai Composite Index's fluctuations around the 4000-point mark, indicating a growing market interest in this segment [2]. Group 1: Performance Comparison - Since 2010, the micro-cap stock index has outperformed major indices like the Shanghai 50, CSI 300, CSI 500, CSI 1000, and National 2000 in most years, except for 2017 and 2020 [2]. - The absolute performance data shows that in 2015, the micro-cap index surged by 229%, while the CSI 300 only increased by 6% [3]. - In 2023, the micro-cap index recorded a 50% increase, significantly outperforming other indices [3]. Group 2: Excess Returns Analysis - The excess returns of the micro-cap index are attributed to PB (Price-to-Book) recovery and the switching between high and low valuations [8]. - The report indicates that the contribution of trading frequency to excess returns is limited, while the profitability of micro-cap stocks does not significantly influence their overall returns [8]. - The strategy behind micro-cap stocks is characterized by a "reverse selection" feature, where stocks that have risen significantly are removed from the index, allowing for a systematic "buy low, sell high" approach [6]. Group 3: Trading Strategy Insights - The micro-cap index employs a mechanism that automatically executes a rebalancing strategy, enhancing its ability to capture structural reversal opportunities during market volatility [6]. - The trading environment for micro-cap stocks is influenced by both short-term trading and momentum strategies, which can amplify volatility during periods of liquidity tightening or systemic risk [8].

Core Viewpoint - The micro-cap stock index has consistently outperformed major broad-based indices this year, attracting significant market attention. The excess returns are primarily driven by PB (Price-to-Book) recovery and valuation switching rather than profit growth [1][12]. Historical Performance - Data shows that the micro-cap stock index has outperformed major broad-based indices in most years since 2010, with the exception of 2017 and 2020, typically generating excess returns [2]. - Even with a reduction in trading frequency from daily to quarterly, micro-cap stocks continue to yield substantial returns, indicating the stability of their excess returns [4]. Macro Factors - Historical experience indicates two macro factors significantly influence micro-cap stock performance: 1. Micro-cap stocks tend to perform well when liquidity is abundant. 2. They also show better gains during periods of declining inflation, particularly in the latter stages of recessions and early recovery phases [5]. Drivers of Excess Returns - The core driver of excess returns in micro-cap stocks is valuation recovery. Analysis reveals that increasing trading frequency contributes minimally to excess returns, and that returns are not closely tied to profitability levels. Notably, micro-cap stocks with negative net profits have increasingly contributed to overall returns since 2018 [7]. - The report identifies that excess returns primarily stem from PB recovery and the switch from high to low valuations, with PB contribution and PB discount being the main sources of returns [7]. Investment Strategy - Data validation indicates that smaller market capitalization and lower PB values correlate with a higher probability of achieving excess returns over the next three months. Therefore, selecting small-cap stocks with low PB can effectively capture micro-cap opportunities [9][10]. Current Market Conditions - The current level of crowding in micro-cap stocks is at a historically high percentile, with valuations also at a relatively high historical percentile. Historical data suggests that when micro-cap PB is significantly higher than the overall market, their performance tends to be poor, as seen in 2017 and 2020 [10].