The broader market has seen increased volatility and a generally weaker trajectory recently. After months of dormancy, small and micro-cap stocks have carved out their own independent rally, once again drawing the market's attention. The key question now is whether this marks a genuine turning point for the small-cap style following the earlier deep correction. Lin Muchen, fund manager of the Zhongjia Specialized and Innovative Quantitative Stock Selection Fund at Zhongjia Fund, which focuses primarily on small and micro-cap quantitative strategies, believes this rebound is the result of multiple positive signals converging. From a long-term perspective, he notes that small and micro-caps possess a sustained upward Beta attribute, and the asset class has now entered a valuation-attractive accumulation zone.

Style rebalancing window opens, small-cap tailwinds are distinct

Lin points out that the earlier sharp pullback in small and micro-caps mainly stemmed from a capital siphoning effect in a zero-sum market. With insufficient incremental capital, funds concentrated heavily into hot sectors like telecommunications and semiconductors, creating an extremely structured market. Overcrowded trading in these areas disrupted the original liquidity balance for small-caps. Therefore, the previous decline was more a result of liquidity strain rather than any substantial deterioration in the fundamentals of small and micro-cap companies. Recently, as market crowding has gradually eased, capital has begun rotating from overheated sectors into undervalued assets, making small and micro-caps a key beneficiary of this style rebalancing. Moreover, a significant number of high-quality targets in emerging industries, frontier technologies, and high-prosperity niche sectors are concentrated within the small and mid-cap range. If the technology rally resumes, small and micro-caps are well-positioned to fully capture the spillover benefits of industrial prosperity, offering considerable growth headroom.

Valuations near historic lows, ample long-term upside

From a valuation perspective, Lin notes that both the absolute price-to-book ratio of the small-cap segment and its relative valuation compared to the Wind All-A Index have retraced to historically low territory. The thick margin of safety in valuations limits further downside, signaling that small and micro-caps have entered an opportunity zone. Over a longer cycle, the returns from small and micro-caps are driven by the small-cap premium, reversal effects, and liquidity compensation. The underlying logic has not been broken by short-term adjustments. Combined with the current low valuations, the dual drivers of valuation recovery and earnings growth are set to support ample long-term upside for the sector. Currently, the fund managed by Lin, the Zhongjia Specialized and Innovative Quantitative Stock Selection Fund, focuses deeply on the small-cap arena, seeking out niche leaders and hidden champions. By leveraging a mature multi-factor quantitative framework, it aims to select high-quality stocks and strive to capture the long-term dividend from small-cap investing.

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