The year 2025 has marked a significant shift in the dynamics of the Chinese investment landscape, particularly within the context of the Spring FestivalThis period not only heralds the traditional celebrations but also brings to the forefront the growing influence of artificial intelligence (AI) in the financial sectorsDeepSeek, an innovative AI enterprise, has ignited a fervor for technology stocks, shifting market sentiment toward a growth-centric philosophyThis transformation has left the previously favored dividend sectors vulnerable, leading to a notable correctionData from Wind reveals a challenging scenario for dividend-bearing investments as of February 12, with declines of 4.79% and 3.2% observed in the Dividend Index and Low Volatility Dividend Index, respectively.

Interestingly, while many actively managed equity funds have posted strong returns—some even exceeding 50%—the performance of dividend-focused funds has been lacklusterAs highlighted by Wind statistics, there are currently 164 equity dividend-focused funds with an average yield of -0.75%, condemning 71.3% of these funds to negative performanceThe reasons behind this downturn are multifacetedA representative from a mid-sized fund company explained that the dividend index has experienced a decline, exacerbated by sector-specific downturns in industries like electricity and coal, both of which contributed to the overall negative impact on this investment segment.

The coal sector, which has been a significant contributor to the dividend index’s struggles, has come under intense scrutinySince the beginning of 2025, a collective downturn in dividend strategy indices has undermined their previously esteemed reputation for stabilityNot only did mainland China experience a drop, but the Hong Kong dividend index followed suit with a 1.84% decrease as of the same date.

According to data from Morningstar (China), the dividend and value indexes significantly outperformed their growth counterparts in the years preceding 2025 (2022, 2023, 2024). Nevertheless, as the dividend index attempted to maintain its strength in early 2025 amid shifting winds of market sentiment, it found itself lagging behind growth indices once more

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Li Yiming, a senior analyst at Morningstar (China), pointed out that fluctuations between growth and value stocks affect segments like technology and dividends, reflecting the broader market style rotations.

This ebb and flow between sectors is described by researcher Bi Mengnian as a "seesaw effect," wherein funds vacate the dividend landscape in favor of growth stocks with higher potential returnsCurrently, a lack of substantial capital inflow into the market intensifies this phenomenon, characterized by a battle among existing players for available resourcesThe strong performance of technology sectors such as semiconductors and AI is convincing investors to pivot toward high-growth equities, further exacerbating the exodus from dividend-focused investments.

Li Yang, Executive Director at Dacheng Fund's Index and Futures Investment Division, highlights that the switch in market style primarily reflects a defensive strategy where investors traditionally favor coal stocks to mitigate volatilityHowever, with the rise of AI technology stocks, capital quickly shifts towards more aggressive investments, leaving sectors like coal, which are perceived as defensive, vulnerable to declines.

The ongoing adjustment of market styles has brought the performance of coal, oil, and petrochemical industries into sharp focusThese sectors hold substantial weight within the dividend indices, notably in indices such as the CSI Dividend and Shanghai Dividend indicesSlow recovery in downstream demand and a decline in coal prices have had a severely negative impact on dividend fundsAs observed, coal prices have suffered from a combination of this year's warm winter leading to lower than expected demand and existing high inventory levels, suggesting an ongoing oversupply that clings heavily on the performance of traditional dividend assets.

Despite the ongoing turbulence in these traditional markets, dividend-themed exchange-traded funds (ETFs) have managed to attract significant capital

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Wind reports that as of February 12, 2025, 40 dividend-themed ETFs have collectively drawn in over 12.4 billion yuanThis peculiar trend raises the question: why, amid a sector retreat, does capital continue to flow into these ETFs?

Li Yang provides insight into this conundrumHe notes that index funds boast clear styles and transparent underlying assets, allowing investors to engage in strategic buying during dipsAs investor sophistication increases, behaviors such as dollar-cost averaging are becoming increasingly evidentAdditionally, although the dividend index has faced downturns, its yield has concurrently risenAs of February 11, 2025, the CSI Dividend Index boasted a remarkable yield of 6.35%, placing it in the 95.11% historical percentile when compared to the meager 1.6% yield of ten-year government bonds, providing a compelling investment rationale based on risk-to-reward expectations.

The external landscape has, however, become increasingly challengingThe U.S. imposing a 10% tariff on imports from China, combined with rising probabilities of the Federal Reserve pausing interest rate cuts, diminishes the prospects for rapid capital infusion into A-sharesAccording to Li Yang, the gradual recovery of China's economic fundamentals and the timing required for policy implementations to reflect positively on corporate earnings necessitate patienceThis cautious stance illustrates a shift towards higher quality and sustainable investment practices among seasoned investors opting for the safety of dividend ETFs.

Market analyst Li Yiming asserts that despite the recent struggles, the fundamental long-term value of the dividend index remains intactEmphasizing safety and robust returns, the construction methodology of dividend indices provides a safety margin with a keen focus on delivering returns to investorsThe current correction in the dividend index offers a strategic entry point for long-term investorsThe intrinsic nature of dividend stocks—often characterized by stable earnings and healthy cash flows—further buttresses the long-term perspective investors must take.

As the year progresses, analysts speculate on how the fortunes of the dividend sector might evolve amidst the prevailing dominance of tech stocks

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