Huachuang Securities' Zhang Yu: Sharp's review under a global perspective compared with A shares' "new normal"

By reviewing the Sharpe ratios of major global markets over the past twenty years, we found that in 2025, the Chinese stock market ranked first among major markets with a Sharpe ratio of 1.72. The high Sharpe ratio in 2025 was based on a significant convergence in annualized volatility, showing a "low volatility, steady progress" characteristic that made the Chinese market highly attractive in comparison to others. Comparing Chinese and American stock markets, the average Sharpe ratio over the past twenty years was 0.20 for China and 0.85 for the US, with China's Sharpe ratio historically significantly lower than that of the US. However, in 2025, the Sharpe ratios for China and the US were 1.72 and 0.72 respectively, marking the first time China's Sharpe ratio surpassed that of the US. Historically, global stock markets have shown a mean reversion property in Sharpe ratios. However, the volatility of Sharpe ratios in emerging markets such as China and Vietnam is generally higher than that of developed markets like Korea and Europe. Cross-country experience suggests that the proportion of financial assets held by residents is highly positively correlated with the long-term Sharpe ratio of the market - the higher the market's Sharpe ratio, the higher the proportion of financial assets held by residents. If the "high efficiency, low volatility" characteristic exhibited by the Chinese stock market in 2025 becomes a trend, this "new normal" will be of great significance in reshaping residents' confidence in equity assets. In terms of global stock and bond Sharpe ratios in 2025, a significant "stocks strong, bonds weak" trend was observed, with investment efficiency in major economies showing pronounced differentiation. Equities became the core source of annual excess returns, while bond assets generally stagnated and even exhibited rare negative contributions. In the equity markets, China, Vietnam, and Japan showed extremely high "cost-effective" characteristics. China's stock market, with a Sharpe ratio of 1.72, ranked first, demonstrating significantly high risk-adjusted returns - maintaining an annualized return of nearly 20% with a volatility of only 11.6%, indicating a robust recovery after a macro policy shift. In contrast, Vietnam and Japan's stock markets achieved higher returns, but with volatilities approaching 20%, resulting in slightly lower Sharpe ratios than China. The Korean market showed a lack of "sense of achievement" despite extreme returns. Korea's market had the highest return of 66.9%, topping global major markets. However, due to its extremely aggressive market style, the volatility was amplified to an astonishing 181.5%, resulting in a Sharpe ratio of only 0.37. This highlights that the lack of "pulse growth" accompanied by low volatility may be difficult to a real "investment sense of achievement" for residents. The bond market faced significant challenges in 2025. Except for the US and India, the bond Sharpe ratios for China, Japan, Korea, Vietnam, and Europe were negative. China's bond market had a Sharpe ratio as low as -1.93, mainly influenced by the negative turn in annualized returns; the US and India were the markets among the major global markets with a "positive for both stocks and bonds" Sharpe ratio, with the US bond market achieving a risk return ratio of 0.46 under a low volatility of 4.3%, reflecting its resilience as a global safe-haven asset. In conclusion, the Chinese stock market in 2025 not only broke out of its slump, but also led in risk-adjusted returns (Sharpe ratio) among major economies globally. Its performance can be summarized as "high efficiency, low volatility." While the stock market led in Sharpe ratios, China's bond market saw its Sharpe ratio drop to -1.93 in 2025, with an annualized return of -4.3%. This extreme differentiation in stock and bond performance may indicate that funds are flowing from traditional safe-haven bonds to more efficient equity assets. --- Regarding the evolution of global stock Sharpe ratios over the past twenty years, by tracing the trends of the Sharpe ratios in the markets of China, the US, Japan, Korea, Europe, Vietnam, and India since 2000, we found: Firstly, the volatility of Sharpe ratios in emerging markets is generally higher than in developed markets. Whether in developed or emerging markets, Sharpe ratios exhibit a mean reversion property. However, the volatility of Sharpe ratios in emerging markets tends to be higher than in developed markets. Analyzing the Sharpe ratio volatilities of various economies over the past 20 years, we found that China and Vietnam had the highest Sharpe ratio volatilities, at 1.60 and 1.57 respectively, while Korea and Europe had the lowest Sharpe ratio volatilities, at 0.36 and 0.86 respectively. Secondly, in 2025, China's Sharpe ratio reached its highest level since 2014. Historically, China's market had a Sharpe ratio of 1.72 in 2025, the highest value since 2014 (1.85). Unlike in 2007 or 2014, where the recoveries relied on index surges and high volatility strategies, the 1.72 in 2025 was achieved against a backdrop of an annualized volatility of only 11.6%, displaying a "high efficiency, low volatility" characteristic. In light of the China Securities Regulatory Commission's emphasis on the enhanced resilience and risk resistance of the A-share market during the "14th Five-Year Plan" period, it is expected that stability in the A-share market will receive increased attention. If the "high efficiency, low volatility" characteristic exhibited by the Chinese stock market in 2025 becomes a trend, this "new normal" will be of significant importance in reshaping residents' confidence in equity assets, guiding the market from short-term trading towards medium to long-term allocation. --- On the international experience of Sharpe ratio driving residents' equity allocation, observing the relationship between the stock market Sharpe ratio and the proportion of stocks in residents' financial assets in various economies: Looking at OECD countries over the past decade, the US had an average Sharpe ratio of 0.70, with an average proportion of stock assets in residents' financial assets of 37.07%, exhibiting a typical high Sharpe ratio and high equity allocation. Australia, with an average Sharpe ratio of 0.19, had an average proportion of stock assets in residents' financial assets of 18.94%, showing a typical low Sharpe ratio and low equity allocation. Using Sharpe ratio as the independent variable and the proportion of stock assets as the dependent variable, regression analysis shows that a 0.1 unit change in the Sharpe ratio leads to a 1.56 percentage point increase in stock allocation. Over the past decade, the Shanghai Composite Index in China had a Sharpe ratio of 0.17, and according to a survey by the People's Bank of China in 2019, the proportion of stocks in urban residents' financial assets was 6.4%. This indicates that if the Sharpe ratio of the Shanghai Composite Index continues to rise, the household sector may allocate more to stocks. Source: WeChat Official Account "Yi Yu Zhong De"; Author: Zhang Yu, Deputy Director of Hua Chuang Securities Research Institute and Chief Macro Analyst; GMTEight Editor: Chen Yufeng.