|AlphaShares Indexes||January 2010||2010||1 Year||3 Year|
|AlphaShares China All-Cap Index||-9.04%||-9.04%||69.74%||9.58%|
|AlphaShares China Small-Cap Index||-6.53%||-6.53%||104.44%||4.51%|
|AlphaShares China Real Estate Index||-12.62%||-12.62%||62.31%||0.67%|
|FTSE/Xinhua China 25 Index||-9.36%||-9.36%||54.80%||5.71%|
|CSI 300 (A-Shares)||-10.39%||-10.39%||57.88%||15.23%|
The AlphaShares China All-Cap fell -9.04% in January, versus the large-cap dominated FTSE/Xinhua index and A-Shares local CSI 300 Index declined slipping -9.23% and -10.39% respectively this month. The Chinese stock market began to consolidate after the central bank kicked off its tightening cycle much earlier than expected. In addition to the People’s Bank of China selling 1-year bills on January 12th at a higher interest rate for the first time in 22 weeks, China increased it reserve ratio for banks by 50 bps On January 12th. Policy makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles.
China‘s economy accelerated to its fastest pace since 2007, with Real GDP rising 10.7% in the fourth quarter from the same period a year ago. World Bank estimates suggest that China, the 5th largest economy just four years ago, will shortly overtake Japan to claim the 2nd largest spot. The shift of economic gravity to China has occurred partly because its growth has remained robust even as the world‘s developed countries suffered the steepest drop in trade and economic output in decades.
In terms of inflation, December headline CPI surprised to the upside, rising 1.9% from a year earlier, after a 0.6% rise in November. Policy markets are weighing the need to curb inflation and the necessity of maintaining stimulus to ensure a smooth recovery as they set to engineer a soft landing. While the 10.7% Q4 GDP growth gave China an 8.7% growth for 2009, the government target was 8%.
As China adopts a more prudent liquidity policy, the moves came much sooner than expected, causing banking stocks to sell off. The interest rate increases came just seven days after Governor Zhou Xiaochuan posted on the central bank website that the country would maintain a “moderately loose” monetary policy. Financials were the worst-performing sector in January, falling -11.87%. The worst performers were Beijing Capital Land (2868 HK) and Greentown China Holdings (3900 HK), as the two real estate managers fell -22.97% and -23.64% respectively this month. The Industrial & Commercial Bank of China (ICBC; ticker 1398 HK) was the largest negative contributor to index returns, falling -11.63%. It is the nation‘s largest lender, and has an index weight of 8.36% in the FTSE/Xinhua and 6.76% in the Hang Seng, but is only 5.07% in the AlphaShares All Cap Index, which utilizes a methodology that caps a name at a 5% max weight at its semi-annual rebalance dates in June and December.
Biadu (BIDU US) (1.98% of the Alpha All-Cap Index) happened to squeak out a 0.12% gain in a volatile month that saw its price swing in a range between 386.49 to 467.68 in four trading days and later closed the month at 411.71. The company traded between those extreme levels in a four day period after Google had announced its potential exit from the country‘s search market on January 13th after it claimed it was a victim of a sophisticated cyber attack. Google holds around a third of the Chinese search market, far behind the 60% controlled by market leader Baidu, which has a close relationship with the Chinese government. Yahoo is a distant third, with less than 10%. The unresolved China-Google tussle is a worrisome sign of ideological protectionism to free speech advocates, and a source of market risk and a potential opportunity for local and global internet stocks.
After being the largest negative contributor to index returns the prior month, China Mobile was the largest positive contributor this month, gaining 1.08% in January. Analysts noted that the company‘s stable cash flow and its high dividend yield are major catalysts in an increasingly volatile market. In addition, there seems to be excitement about a forthcoming mainland listing, and speculation of a possible dividend increase in the wake of lower capital spending.
Telecommunications stocks as a group fell only -1.53% in January. The sector‘s prospects seemed to get a boost from the government‘s plans to promote the “convergence” of telecommunications, broadcasting, and the internet will increase competition in the broadband market. The “triple play” plan aims to facilitate new economic development and stimulate consumption by offering integrated voice, broadcasting and internet services.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|