|AlphaShares Indexes||February 2012||2012||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||6.70%||18.77%||-1.29%||26.86%|
|AlphaShares China Small-Cap Index (NYSE HAO)||12.71%||21.99%||-12.26%||29.57%|
|AlphaShares China Real Estate Index (NYSE: TAO)||12.35%||28.07%||3.78%||30.01%|
|AlphaShares China Technology Index (NYSE: TAO)||6.70%||20.35%||-12.24%||35.95%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||0.99%||1.57%||NA%||NA%|
|FTSE/Xinhua China 25 Index||4.55%||16.65%||-1.24%||20.33%|
|CSI 300 (A-Shares)||7.14%||12.38%||-13.96%||10.10%|
China's Consumer Price Index (CPI) rose for the first time in six months to 4.5% from the year earlier. However, with the People's Bank of China (PBoC) announcing a cut in the local banks' reserve requirement ratio (RRR) by 50 basis points on February 14th, the central bank effectively confirmed that its monetary focus has shifted from containing inflation towards selective easing in order to stimulate economic growth. The feeling is that the PBoC will be quick to act should there be any slowdown in the economy. The evidence is that investors are not using defensive puts to protect their downside as much as they had since the start of the monetary easing - even despite the lower cost of such protection as implied volatility continues to fall. The Put /Call ratio for options on the FTSE China 25 ETF fell to 1.25 after trading at 1.44 for the two months prior - just after China had announced it was cutting its RRR for the first time in nearly three years. Prior to the last cut, the PBoC raised the ratio six times in 2011.
The reduction in the RRR by the PBoC follows recent actions to loosen monetary policy by other central banks around the world. The Bank of Japan announced a sizeable ($129 billion) expansion of its assetpurchase program by buying more long-term government bonds, which followed the Bank of England's vote to increase its government bond purchases. Both succeeded the European Central Bank's move to expand aspects of its program of making inexpensive loans to European banks. Last month, the Reserve Bank of India lowered its cash reserve ratio by 50 basis points.
Global monetary policy easing has spurred equity markets higher as global liquidity continues to expand. Traditionally, markets move higher as confidence builds and fears surpass - which is evident in the selloff of volatility. In 2011, the AlphaShares China All-Cap Index (Bloomberg: ACNACTR) fell -17.96% as the country factors driving the underperformance were tight monetary policy, a weakening property market, and asset quality concerns for the banks. However, the index gained 6.70% in February and is up 18.77% YTD thanks to additional selective easing by the PBoC and a strengthening property market - evident by the strong gains in the Alpha Real Estate Index (ACNRE) up 12.35% in February and up 28.07% YTD.
The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), fell -7.59% to finish February at 22.63. The CHIX is down -14.22% YTD after beginning 2012 at 24.49. Implied volatility indexes, commonly referred to as "Fear Gauges", fell broadly on the back of the global market rally. The CBOE S&P 500 Volatility Index, or VIX, closed February at 18.43, down -5.20% during the month and is off -21.24% so far in 2012. The S&P 500 gained 4.06% in February and is up 8.59% year-to-date. Traditionally, market performance and changes in implied volatilities tend to be negatively correlated, so it is not surprising to see volatility melt away as global equities post strong rebounds.
The largest positive contributor to overall index performance this month was CNOOC, gaining 11.65% in February. Shares of China's biggest offshore energy producer gained as oil rose to a nine-month high as officials from the International Atomic Energy Agency were denied access to an Iranian military base, increasing speculation that tensions between Iran and Western nations will disrupt oil shipments. China, which counted Iran as its third-largest supplier of crude last year after Saudi Arabia and Angola, opposes trade restrictions against Iran and said sanctions on its oil exports "are not constructive" (as per China's Ministry of Foreign Affairs).
Baidu (BIDU US) was the second largest positive contributor to index returns, gaining 7.20% February. Shares of the owner of China's largest search engine gained as it reported Q4 profits increased 80% amid higher online advertising spending. Baidu has expanded its dominant position in China's internet search market ever since Google decided in 2010 to relocate its search engine to Hong Kong following a standoff with the Chinese government over censorship. Baidu now handles over 80% of search inquiries in China.
Smaller stocks also contributed to positive performance, as the AlphaShares Small-Cap Index (ACNSC) gained 12.71% this month, and is now up 21.99% YTD. Alibaba.com (1688 HK), China's biggest corporate e-commerce site and the largest holding in the small cap index, surged 58.11% after its parent company bid to buy out minority shareholders. Alibaba Group Holding, controlled by billionaire Jack Ma, offered 13.50HKD for the 27% of the company it doesn't already own. Shares of the stock started February at 8.36 HKD before closing the month at 13.22 HKD.
The Chinese H-Shares are listed and traded in Hong Kong, which is intricately linked to global trade and finance. Many view the Hong Kong Stock Exchange indexes as a leading indicator for the health of the world's economy. The Hang Seng Index gained 6.32% in February to bring its 2012 YTD to 17.61%, making it the best start to the year since 1991. Hong Kong is the second best performer in the MSCI World Developed Markets index so far in 2012 (behind Singapore's 19.99% gain).
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|