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AlphaShares Monthly Letter: January 2011

AlphaShares Indexes January 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 0.07% 0.07% 19.50% 4.34%
AlphaShares China Small-Cap Index (NYSE HAO) -2.07% -2.07% 21.77% 9.50%
AlphaShares China Real Estate Index (NYSE: TAO) -0.11% -0.11% 26.52% 0.54%
AlphaShares China Technology Index (NYSE: TAO) -5.55% 5.55% 21.08% 19.35%
FTSE/Xinhua China 25 Index -1.08% -1.08% 11.28% -0.53%

China News:

China's economy picked up in Q4 to 9.8% year on year from 9.6% in Q3, after slowing from 10.3% in Q2 and 11.9% in Q1. On the year, GDP rebounded to 10.3% in 2010, just three years removed from the global financial crisis and up from 9.2% in 2009. China's gross domestic product stood at $6.1 trillion in 2010, making it the world's second largest economy behind the United States, whose GDP is about $14.6 trillion. The government had set the full-year growth target at 8% in early 2010. For the year ahead, China, citing tighter credit and rising demand, forecasts its annual GDP growth is expected to be 9.8%.

On the inflation front, China's consumer price index (CPI) rose by 4.6% in December year on year, and came in at 3.3% on the whole for 2010. The latest monthly figure was slightly lower than November's 5.1%, a 28-month high, but slightly higher than October's 4.4% growth. The People's Bank of China (PBoC) said in December that it was switching its monetary stance from "relatively loose" (designed to combat the global economic crisis) to "prudent" in 2011 (seeking to fight excess liquidity). The Center for Forecasting Science of the Chinese Academy of Science, a government think tank, said that inflation, a source of major concern for policy makers, is likely to be "under control" at 3.7% in 2011 - just above the central bank's current target of 3% or less in 2011. The PBoC raised its benchmark rates twice and the reserve requirement ratio seven times since January 2010.

The Chinese yuan traded at 6.5830 on January 26th - its strongest level since China unified official and market rates at the end of 1993. It appreciated 0.18% against the dollar in January after gaining 3.33% against the greenback in 2010. An appreciating currency can help the PBoC stave off inflationary pressures, as well as boost the buying power of the Chinese consumer.

China Equity Markets:

The AlphaShares China All-Cap Index (ACNACTR) managed to post a small gain of 0.07% in the first month of 2011. Small cap stocks (represented by the AlphaShares Small-Cap index: ACNSC) underperformed their larger sized counterparts (measured by the FTSE China 25 Index) slipping -2.07% versus -1.08% in January, after outperforming them 16.23% versus 1.96% in 2010. Technology was the best performing sector this month, as the AlphaShares China Technology Index (ACNITTR) gained 5.55%.

Tencent Holdings (700 HK) and Baidu (BIDU US) were the two largest positive contributors to January returns, gaining 19.26% and 12.53% respectively. Tencent, China's biggest Internet company by market value, closed the month at an all-time high of 203.40. It has formed a joint venture with US based, the world's leading group purchasing website, to expand the Chinese group purchasing market. In addition, Tencent has set up a $759 million fund to invest in solely in technology companies.

Meanwhile, Baidu, China's largest Internet search engine, captured a 75.5% local market share of total search revenues in Q4, as reported by Digitimes. Google (GOOG US) came in a distant second with 19.6%, while Beijing-based Sohu (SOHU US) pulled in 1% of market share. Sohu's ADR climbed 22.19% in January on the US Nasdaq making it the 3rd best Chinese stock return for the month. The best and 2nd best performing stocks were also technology stocks whose shares trade in the US: AsiaInfo-Linkage (ASIA US, up 29.51%) and Sina Corp (SINA US, up 23.87%).

After being the largest positive contributor to both indexes for December (+8.13%) and for 2010 (+50.77%), CNOOC (883 HK) was the largest negative contributor for both indexes in January, dropping -6.98%. China's largest offshore oil and gas producer said it plans to raise production 12% in 2011, after paying a combined $8.5 billion for energy assets in Africa, Argentina, and the US over the past year to bolster is reserves. The lower-than-anticipated production volume growth disappointed investors, after the company's output increased 44% in 2010.

Following a seesaw 2010 market that tested many investment professional's constitution, the 2011 "Year of the Rabit" is forecasted to be a very placid year - a very much welcomed and needed reprieve after a ferocious "Year of the Tiger." In Chinese astrology, the rabbit is a docile but astute animal, associated with good luck and the accumulation of indirect wealth.

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.