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AlphaShares Monthly Letter: December 2009

AlphaShares Indexes December 2009 2009 1 Year 3 Year
AlphaShares China All-Cap Index 0.67% 71.75% 71.75% 11.83%
AlphaShares China Small-Cap Index 2.60% 105.29% 105.29% 7.27%
AlphaShares China Real Estate Index 1.69% 82.43% 82.43% 5.74%
FTSE/Xinhua China 25 Index -1.12% 54.24% 54.24% 6.81%
CSI 300 (A-Shares) 1.82% 96.59% 96.59% 26.06%

China Equity Markets:

The AlphaShares China All-Cap Index gained 0.67% in December, to give it a 71.75% return for 2009. While the large-cap dominated FTSE Xinhua index slipped -1.12% this month to finish 2009 with a 54.24% gain, small cap names were the story in 2009 as the AlphaShares Small-Cap index finished December with a 2.60% gain to improve 2009 returns to 105.29%

Tencent Holdings (700 HK) is a leading internet company in China (3.13% index weight in YAO), and was the largest contributor to Chinese equity benchmark returns for the month (up 17.53%) and for the year (up 237.29%). CEO Ma Huateng reported that the revenues of China’s online gaming industry are expected to reach $4.03 billion in 2009, a 50% increase from the year prior.

China Mobile (941 HK) was the largest negative contributor to both the Chinese Equity market and Emerging Market returns during 2009 (finishing the year at a 4.68% weight, after being subject to the index’s 5% max in the December 18th rebalance). While the company had a total of 518 million subscribers at the end of November, its market share declined to 72% from 74% in the beginning of 2009. The company closed the year by removing Zhang Chungiang from his positions of Vice Chairman and Executive Director due to alleged serious financial irregularities. Zhang joined the state-owned company in May 2008, when the government ordered the country’s six biggest phone companies to merge in a reorganization aimed at boosting competition. He was also the Communist Party secretary at the company.

On the month, the Bank of China (3988 HK) (5.07% weight in YAO) was the worst contributor to Chinese returns, falling -3.94%. Financials weighed on December performance, declining -2.35% as the sector is expected to begin fund raising in 2010. On December 18th, Fitch Ratings said in its annual review of Chinese banks that lenders may be more “strained” than they appear. The review noted that as the industry starts to look to off-balance sheet transactions to make room for more loan growth, this may represent a “growing pool of hidden credit risk.”

Outside of the China equity universe, investors continue to find pro-China story-stocks in multinational companies, even as their sales may struggle in their home markets. General Motor’s (GM US) automobile sales in China grew 67%, partially due to Chinese government policies aimed at boosting domestic demand, such as a 50% purchase tax cut for vehicles with small engines to 5%— a subsidy showing both the government’s dedication to boosting consumer consumption and green technologies.

Last, Chinese stock exchanges (Hong Kong, Shenzhen, and Shanghai) issued twice the money secured by initial public offerings than the US in 2009 ($26.5 billion). Hong Kong alone outpaced the US, raising $27.2 billion. The US had previously dominated global IPOs by exchange nationality every year apart from 2006 (UK) since Dealogic began its rankings in 1995. The rankings underscore how global economic and financial activity is shifting from west to east, especially markets connected to the Chinese economy.

China News/Highlights:

In his New Year message posted on the Chinese central bank website, Governor Zhou Xiaochuan said that 2010 will be a crucial year for “defeating” the financial crisis, and the country will maintain “moderately loose” monetary policy. The People’s Bank of China pledges to increase policy flexibility will encourage lending to new strategic industries and to boost employment.

On December 7th, China concluded its annual Economic Work Conference, a policy-setting meeting of the country’s senior economic authorities and top provincial and central government leaders. In response to excessive expansion in certain sectors of the economy, authorities have responded with targeted measures such as increasing banks’ capital adequacy requirements (from 8% to 11%), and lending curbs in industries facing overcapacity (such as steel).

While China will almost certainly meet its 8% GDP growth target for 2009 (some economists forecast 9.5% GDP growth in 2010), Chinese authorities have recognized that the rapid pace of recovery has exacerbated some of the economy’s structural imbalances (fixed asset investment accounted for 95% of Q1-Q3 growth). In the upcoming year, the authorities will focus on rebalancing economic growth, primarily by supporting consumption and private investments.

Jonathan J. Masse, CFA Dr. Burton G. Malkiel
Senior Portfolio Manager Chief Investment Officer

Disclaimer text

Past performance is no guarantee of future results. The information presented in this letter is for background purposes only and is subject to updating, revision and amendment, and no representation or warranty, expressed or implied, is made, and no liability is accepted by AlphaShares, LLC in relation thereto. This letter is neither an offer to sell nor a solicitation of any offer to buy interests in the Fund. Any such offering is made only pursuant to the Fund’s Private Placement Memorandum and subscription agreement, which should be read in their entirety. No offer to purchase shares in the Fund will be accepted prior to receipt by the offeree of the aforementioned documents and completion of all appropriate documents. These materials have been sent to you in a confidential manner. The information contained herein may be proprietary. No part of these materials may be reproduced in any manner without the Investment Manager’s prior consent.