|AlphaShares Indexes||December 2012||2012||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||5.18%||20.27%||20.27%||2.34%|
|AlphaShares China Small-Cap Index (NYSE HAO)||5.92%||23.30%||23.30%||-1.25%|
|AlphaShares China Real Estate Index (NYSE: TAO)||2.22%||55.01%||55.01%||8.89%|
|AlphaShares China Technology Index (NYSE: TAO)||4.12%||9.07%||9.07%||-3.50%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||0.36%||4.49%||4.49%||NA|
|FTSE/Xinhua China 25 Index||6.46%||18.17%||18.17%||0.01%|
|CSI 300 (A-Shares)||17.76%||11.02%||11.02%||-7.64%|
A breadth of positive sentiment in local equities and options came alongside China’s economic data this month. Numbers showed improvement in broad-based economic activity, suggesting that the recovery remains on track. Retail sales, the main measure of consumer spending, rose 14.9% in November from 14.5% in October. Fixed asset investment, a key gauge of infrastructure spending was up 20.72% year-onyear in the first 11 months of 2012, from 20.7% in the January-October period.
The improving economic picture seems primarily linked to domestic demand, as China’s export sector continues to grabble with a slowdown in its biggest trading partners. A new export orders sub-index retreated below 50 in December after rising into expansionary territory in November for the first time in seven months. The Economic Work Conference held on December 15th and 16th emphasized the quality, efficiency, and sustainability of economic growth, with a focus on urbanization as a key area to support domestic demand.
The AlphaShares China All Cap Index (Bloomberg: ACNACTR) gained 5.18% in December to bring 2012 returns to 20.27%. Mega-cap names fared better than their smaller cap piers this month, as the FTSE China 25 Index gained 6.46% versus the AlphaShares Small-Cap index (ACNSCTR) increase of 5.92%. However, smaller stocks in China had a better year, up 23.30% on the year versus 18.17%. While the mainland A-Shares market (available to local investors, but restricted to international investors except with QFII quotas) struggled for the first eleven months of the year and even hit a four-year low on December 5th, the CSI 300 Index (SHSZ300) rebounded sharply over the entire month of December to rally 17.76% and pull the index out of the red to post a 11.02% gain in 2012. The double-digit rally followed desperate pleas from the country’s regulators in November telling local investors that it was a “golden opportunity” to buy low.
The Hang Seng A-H Premium Index (HSAHP) tracks the price premium of mainland A-Shares to their corresponding H-Shares listings in Hong Kong. Traditionally, A-shares trading in Shanghai & Shenzhen tend to be more expensive than the H-shares trading in Hong Kong due to a lack of investment options available to domestic buyers and restrictions that prevent them from easily investing overseas (QDII quotas aside). The index had hit a discount low of 94.96 on December 13th; however the strong bounce over the month actually brought the index to a premium of 101.01 to end the year. Historically, it has averaged a 20% premium and even traded over a 100% premium back in January of 2008. The HSAHP Index began 2012 at 111.83.
Option investors are seemingly positioning themselves for a bullish year ahead as over 1 million calls traded in the FTSE China 25 Index options market in December. Perhaps even a more optimistic indicator for the year ahead was how the Put/Call ratio shifted from 1.21 in November to 0.63 in December – meaning that over 1.58 calls traded this month for every put this month, whereas 1.21 puts traded per calls in the prior month. Calls represent bullish contracts, whereas puts tend to be defense positions. The AlphaShares Chinese Volatility Index, or “CHIX” (Bloomberg: ASCNCHIX), closed 2012 at 19.50, up 14.71% in December, but down -26.08% since the start of the calendar year where it began at 26.38. During 2012, the CHIX traded as high as 31.10 on May 4th, and as low as 17.00 on November 30th. The 14.10 point trading range was the narrowest annual width China volatility has traded in since 2006.
All sectors recorded positive gains for the year, and all but one posted positive returns for the month. Consumer Staples were the only group to decline this month, falling -1.49%. On the other side of the sector return coin, Financials led the way gaining 7.66% in December. The AlphaShares All-Cap index, however, has diversification rules that do not allow for a sector to exceed a 35% maximum index weight.
Commercial banks and insurance companies were the two industries that contributed the most to index returns, gaining 7.64% and 10.79% this month. Both groups surged following news that the China Security Regulatory Commission (CSRC) said they will be allowed to develop and manage mutual funds in a bid to reinvigorate local investors who have faced limited investment options and a struggling local equity market over the past few years. Of the largest positive contributors to index returns, 8 of 10 came from the Financial Sector. China Life (2628 HK) had the largest contribution with a 10.71% gain in December.
December was a relatively quiet month for regional currencies. The Hong Kong dollar, which is linked to the US dollar at the rate of around 7.8 HKD, was flat in December, but managed to squeeze out an appreciation of 0.22% on the year. The Chinese yuan slipped -0.06% in December, but managed a 1.03% appreciation in 2012. It has gained 9.58% since June 2011 when the People’s Bank of China (PBoC) began to let its currency float gradually up following a peg had in place since the 2008 financial crisis.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|