|AlphaShares Indexes||February 2013||2013||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||-4.23%||-0.07%||1.20%||4.42%|
|AlphaShares China Small-Cap Index (NYSE HAO)||-0.61%||5.27%||6.41%||1.47%|
|AlphaShares China Real Estate Index (NYSE: TAO)||-2.67%||3.54%||25.32%||12.84%|
|AlphaShares China Technology Index (NYSE: TAO)||-2.29%||8.14%||-2.00%||-0.76%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||0.28%||1.37%||4.28%||NA|
|FTSE China 25 Index||-5.49%||-1.32%||-0.04%||2.29%|
|CSI 300 (A-Shares)||-0.56%||6.17%||4.88%||-3.05%|
China's NBS manufacturing PMI eased modestly to 50.1 in February, compared to 50.4 in January. This was the fifth consecutive month that the NBS manufacturing PMI reading stayed above 50. Despite seasonal volatilities, the headline flash PMI stayed above the 50 expansionary threshold - suggesting the underlying economic recovery momentum remains intact. Inflation wise, China's January CPI inflation rate came down to 2.0% over a year ago compared to 2.5% oya in December. On the currency front, the Chinese yuan depreciated -0.04% against the US dollar in February. The currency has gained 0.14% against the US greenback so far in 2013. This follows appreciations of 1.03% in 2012, 4.96% in 2011, and 3.33% in 2010.
China announced plans for a major bond market reform to raise the money the ruling Communist Party needs for a 40 trillion yuan ($6.4 trillion) urbanization program to buoy economic growth and close a chasm between the country's urban rich and rural poor. In the next ten years, the Party plans to bring 400 million to cities over the next decade as the new leadership of president-in-waiting Xi Jinping and premier-designate Li Keqiang seek to turn China into a wealthy world power with economic growth generated by an affluent consumer class. The new leaders continue to emphasize the need to "push forward" with urbanization, calling it a "huge engine" of economic growth.
The AlphaShares China All Cap Index (Bloomberg: ACNACTR) consolidated in February -4.23% after rallying nearly 30% since hitting September 2012 lows, as the previous accommodative monetary policy has morphed into policy risks by reining in non-bank credit growth and property measures. Smaller capitalization stocks fared better than their mega-cap counterparts in February, as the AlphaShares Small-Cap index (ACNSCTR) fell only -0.61% versus the FTSE China 25 Index drop of -5.49%. Those two indexes have returned 5.27% and -1.32% YTD, continuing its 2012 trend of small cap outperformance that saw them return 23.30% and 18.17% respectively last year. On the mainland, the CSI 300, a gauge of 200 yuan-denominated A-shares listed in Shanghai and Shenzhen, slipped -0.56% in February to bring returns to 6.17% YTD.
The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), gained 7.00% in February to close at 16.66. It traded as low as 14.78 on February 1st, marking its most complacent level since January 2006. The spike in implied volatility in the options markets at month's end was most likely due to the extremely low base and extreme complacent levels the market has treaded upon.
China equity returns have been dragged down by heavy weighted sector underperformance (Financials' weight 35.40%; down -5.60%) (Energy weight 14.45%; down -5.68%). Sinopec (386 HK: -6.26%) capital raising, Petrochina (857 HK: -3.61%) earning downgrades and guidance by CNOOC (883 HK: -4.86%) regarding higher capital expenditures with lower production were reasons for Energy sector underperformance. Three of the top four largest negative contributors of return came from the financials: China Life Insurance (2628 HK: -10.38%), ICBC (1398 HK: -4.62%), and China Construction Bank (939 HK: -4.33%).
Chinese Internet search engine Baidu (BIDU US) was the largest negative contributor to index returns, as shares dropped -16.20%. The company reported a 36% increase in Q4 profits, but investors sold shares on worries about the pace of growth - which has slowed for eight straight quarters. Still, operating margins remain high at 49.5%. Baidu was the overall worst performing tech stock this month, which saw the AlphaShares Technology Index (ACNITTR) fall -2.29% in February.
However, there were positive signs within the China tech industry, as three of the four most positive contributors came from the sector. Lenovo Group (992 HK), the world's second-biggest maker of personal computers, gained 7.32% during the month in which the Hang Seng announced it would be added to its benchmark index effective on its March 4th quarterly rebalance. Nasdaq-listed NetEase.com (NTES US), one of China's leading internet portals, gained 10.45% this month after announcing its net profits rose 11% in Q4 boosted by an increase in revenue from the online game sector. AAC Technologies (2018 HK), which supplies speakers for Apple's iPhones and gets more than a quarter of its revenues from Europe, managed to close February at an all-time high after gaining 9.84% during the month.
Want Want China Holdings (151 HK) was the largest positive contributor to returns, gaining 5.64% this month. China's television watchdog has ordered all radio and television channels to cut advertisements suggesting "gift-giving" in line with a broader push to limit corruption and excessive spending, the country's Xinhua news service has reported. It was speculated that money may flow into mid-end items priced below 10,000 yuan (~$1,600 USD) instead. Snack maker Want Want was seen as a possible beneficiary of holiday spending on food. Also, an unexpected $27.3 billion bid for HJ Heinz from 3G Capital and Warren Buffet's Berkshire Hathaway was speculated to have raised awareness regarding the merits of the food products industry.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|