|AlphaShares Indexes||August 2012||2012||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||-2.45%||1.04%||-10.57%||1.10%|
|AlphaShares China Small-Cap Index (NYSE HAO)||-1.15%||-2.19%||-17.92%||-2.77%|
|AlphaShares China Real Estate Index (NYSE: TAO)||-0.98%||25.10%||5.32%||5.96%|
|AlphaShares China Technology Index (NYSE: TAO)||3.21%||-2.34%||-18.88%||0.65%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||0.57%||1.38%||NA||NA|
|FTSE/Xinhua China 25 Index||-4.32%||-2.45%||-11.06%||-3.17%|
|CSI 300 (A-Shares)||-5.11%||-4.85%||-20.58%||-5.15%|
In the local A-Shares market, the CSI Shanghai / Shenzhen 300 Index (SHSZ300) traded at lows not seen in 3 and a half years as the market slumped -5.11% in August to bring YTD returns into the red at -4.85%. However, the China Securities Regulatory Commission (CSRC) once again appealed for confidence in the stock market and cautioned local investors against panic selling - a move described by foreign analysts as very "uncharacteristic" for a securities watchdog (as it would be extremely surprising to envision such a statement by the SEC in the US). A CSRS official was quoted by the Xinhua news agency saying, "All parties should endeavor to build investor confidence. We must have a firm belief that the long-term fundamentals of China's stock market haven't changed and there's no reason to question the vast potential of the capital market." Authorities have also sought to support the market by easing access for foreign investors, cutting trading costs, and encouraging state pension funds to invest in local equities - all in a bid to shore up sentiment as China braces for a once-in-a-decade leadership transition this year.
Before that leadership transition happens, the current Premier, Wen Jiabao continues to be concerned with meeting economic goals, and said the country needs targeted measures to promote steady growth during an inspection tour in Guangdong, China's largest exporting province. He reiterated that the government needs to increase the intensity of macro-economic adjustments to stabilize expansion in the 2nd half of the year. China's export growth collapsed to 1% in July while industrial output and new yuan loans trailed estimates, heightening concerns that a slowdown in the world's second- biggest economy is deepening. A private survey on August 23rd showed manufacturing may contract in August at the fastest pace in nine months and a gauge of new export orders was at its lowest level in more than three years.
The AlphaShares China All Cap Index (Bloomberg: ACNACTR) lost -2.45% in August to bring YTD returns to 1.04%. Stocks with smaller capitalization fared better than their larger cap counterparts, as the former (represented by the AlphaShares Small-Cap index: ACNSCTR) slipped -1.15% on the month with the latter (represented by the FTSE China 25 Index) fell -4.32% this month. YTD, the two indexes are down -2.19% and -2.45% respectively. In the options market, the Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), fell -4.60% and to finish the month at 21.38. The CHIX "traded as low as 18.37 on August 17th to make a 52-week low. The Chinese "fear gauge", as implied volatility indexes are commonly referred, is down -25.34% so far in 2012 as global investors are slowly gaining comfort with the slowing growth in the world's second-largest economy. Traditionally with market performance, changes in implied volatilities tend to be negatively correlated, options are being priced in a most unusual manner with both the index and volatility down both MTD and YTD.
In stock specific news, the month following China Mobile (941 HK) being the largest positive contributor in July with its 9.96% gain, the world's largest mobile operator by subscribers, was the largest negative detractor from index returns in August, as shares gave back -8.99% this month. The company reported earnings that were down -8.33% from a year earlier, despite revenues rising 14.80% (to $22 billion) over the same period. Chinese phone carriers have been squeezed by intense competition and the high costs of installing new mobile technology. The stock makes up 8.12% of the Hang Seng and 10.08% of the FTSE China 25 Index, while it has grown to 5.66% in AlphaShares All-Cap index (ACNACTR) and is subject to a 5% capped weight at its annual December rebalance.
On the other end of the return spectrum, Healthcare was the best performing sector this month gaining 8.61%. Shanghai Pharmaceuticals Group (2607 HK), China's second-largest distributor of drugs, was the best performing stock in the sector, up 20.32%. Drug distributors have benefited from higher government spending on health care that has expanded insurance coverage and boosted subsidies. As many as 95% of Chinese citizens were covered by medical insurance as of last year, up from 87% in 2008, according to health ministry data. The sector makes up 2.26% of the China All Cap index, whereas many of the largerbiased China equity indexes exclude it (neither the Hang Seng nor the FTSE China have any health-care holdings).
The two consumer sectors were next best with Discretionary gaining 7.18% and Staples up 3.81%. Tingyi (322 HK) was the largest positive contributor to index returns, gaining 19.24% in August while reporting a 24% increase in profits on falling raw material costs. Moody's Investors Service said the beverage and snack company's first half 2012 performance shows its strong market position, and continues to support its Baa1 rating and stable outlook.
Last, in currency markets, the yuan appreciated 0.21% against the US dollar this month. YTD the yaun has declined -0.84%. If the deprecation trend continues, it would mark the first full-year decline for the Chinese currency since China ended a decade-long peg against the dollar in 2005.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|