|AlphaShares Indexes||April 2012||2012||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||2.73%||14.04%||-12.69%||13.78%|
|AlphaShares China Small-Cap Index (NYSE HAO)||1.87%||13,48%||-23.69%||12.99%|
|AlphaShares China Real Estate Index (NYSE: TAO)||6.65%||24.16%||-6.58%||15.34%|
|AlphaShares China Technology Index (NYSE: TAO)||-1.44%||16.25%||-23.47%||20.53%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||-0.20%||1.30%||NA%||NA%|
|FTSE/Xinhua China 25 Index||3.51%||9.77%||-12.81%||8.48%|
|CSI 300 (A-Shares)||7.04%||12.05%||-14.06%||2.70%|
There were two big announcements this month concerning China opening up its markets to global investors. On April 3rd, the China Securities Regulatory Commission revealed that it would be more than doubling its quota for qualified foreign institutional investors (QFII), as regulators are allowing more foreign capital flows on the mainland, as concerns of a slowing economy began to bite equity markets in March. The QFII Scheme will see the cap rise from $30 billion to $80 billion (USD) by the end of this year.
On April 15th, the People's Bank of China (PBoC) expanded the daily yuan trading band against the dollar to 1% in either direction from its 0.50% maximum range, in a bid to ward off a slowdown and support the economy. The move signaled official confidence in the strength and pace of the economy's expansion and suggests policymaking is unimpeded by the ousting of Bo Xilai from the Communist Party leadership.
The internationalization of the yuan underlies China's commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate. The yuan appreciated 0.30% this month, bringing its 2012 appreciation against the dollar into the black at 0.25% YTD. Since China launched the exchange rate reform in 2005, the real effective exchange rate of its currency has risen over 30%. With China reporting an unexpected trade surplus of $5.35 billion, it is expected to bring renewed calls from the US and elsewhere for the PBoC to allow further appreciation of its currency.
After February, China equities were among the best performing global markets, but reversed the early 2012 trend with a sharp down move in March. Even so, the broad-based AlphaShares China All-Cap Index (ACNACTR Index) was able to post its best quarterly return in over a year (up 11.01% in Q1). Local equities continued higher in April, advancing 2.73%. The index is now up 14.04% YTD.
On April 13th, the National Bureau of Statistics (NBS) announced that China's economy expanded to 8.1% in the first quarter of 2012, though slowing from the 8.9% expansion in the fourth quarter of last year. It was the country's slowest expansion in 11 quarters. However, the contribution of consumption-to-GDP growth was 60.3% noted the NBS, adding that indicated domestic demand played an increasingly important role in the country's economic growth. Also, retail sales, the major gauge of consumer spending, rose 15.2% in March year-on-year.
Small cap stocks (represented by the AlphaShares Small-Cap index: ACNSCTR) lagged their large cap counterparts (represented by the FTSE China 25 Index) during the month, gaining 1.87% and 3.51% respectively. However, small cap stocks have performed better so far in 2012 as their respective YTD returns are 13.48% and 9.77%.
The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), closed below 20 for the first time in nine months as it closed at 19.95 on April 27th. It closed the month at 20.54, down -4.38% from the prior month as hard-landing fears in the Chinese economy cooled by month's end. Earlier in the month, Chinese equities traded at correction-like levels as hard-landing fears hit fever pitch. The All-Cap index traded as low as -7.64% on April 11th off of its 2012 high, and the CHIX traded as high as 23.80 intermonth.
Even though tech stocks were off -1.44% (as per the AlphaShares China Technology Index: ACNITTR) in April, Tencent (700 HK) was the largest contributor of index returns, gaining 12.65%. China's biggest internet company closed at an all-time high of 243.80 HKD per share. Baidu (BIDU US) was the largest detractor from index returns this month, falling -8.987%. The company reported better-than-expected earnings on April 26th, however, revenues came in at the low-end of Wall Street expectations. The tepid outlook for sales raise questions about whether the internet search company was feeling the effects of the slowing economic conditions in China or whether company-specific issues may be to blame.
After being the second worst sector performer in March (-11.77%), financials rebounded to be the best sector performer in April (+5.60%). Ping An Insurance (2318 HK) had the highest positive contribution to sector returns, gaining 10.65% this month. Insurance stocks gained an average of 6.57% in April.
PetroChina (857 HK), China's biggest oil and gas company, was the index's second largest contributor to April index returns, gaining 7.19%. The company reported that it pumped 2.4 million barrels a day last year, overtaking Exxon Mobil as the world's biggest publicly traded producer of oil. The company has grown rapidly over the last decade by squeezing more from China's aging oil fields and outspending Western companies to acquire more petroleum reserves throughout the world in such places as Canada, Iraq, and Qatar driven by the imperative to lock up as many resources as possible.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|