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AlphaShares Monthly Letter: January 2013

AlphaShares Indexes January 2013 2013 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 4.34% 4.34% 12.75% 7.13%
AlphaShares China Small-Cap Index (NYSE HAO) 5.92% 5.92% 20.67% 2.95%
AlphaShares China Real Estate Index (NYSE: TAO) 6.38% 6.38% 44.66% 16.27%
AlphaShares China Technology Index (NYSE: TAO) 10.67% 10.67% 7.02% 2.06%
AlphaShares Yuan Bond Index (NYSE: TAO) 1.09% 1.09% 5.02% NA
FTSE China 25 Index 4.41% 4.41% 10.58% 4.84%
CSI 300 (A-Shares) 6.77% 6.77% 13.00% -2.09%

China News:

On the economic front, strong Chinese data helped quell any lingering concerns that the world’s secondlargest economy might be headed for a hard landing. China’s official manufacturing PMI fell to 50.4 in January from 50.6 in December, but was the fourth consecutive month above the 50-level that marks expansion. While China recorded its weakest growth in 13 years last year, a 7.9% rebound in Q4 GDP growth helped remove lingering ‘hard landing’ concerns that surrounded the world’s second largest economy throughout much of 2012 – which seemed to hit a fever pitch after the Q3 numbers came in at 7.4%. The 2012 GDP growth of 7.8% was down from 9.3% in 2011 and 10.4% in 2010, but is part of the grander government design aimed at slowing growth and making its economy less dependent on exports in order to better balance its expansion and to make its markets less vulnerable to pricing bubbles.

Criticism over China’s exchange rate regime has abated in recent months. The Chinese yuan appreciated 0.19% against the US dollar during the opening month of 2013. This follows appreciations of 1.03% in 2012, 4.96% in 2011, and 3.33% in 2010. China’s hold’s the world’s largest foreign-exchange reserves, which increased to $3.31 trillion at the end of December from $3.18 trillion a year earlier – its smallest year-on-year growth since 2003.

China Equity Markets:

The AlphaShares China All Cap Index (Bloomberg: ACNACTR) continued its 20.27% annual return in 2012, by gaining 4.32% in the opening month of the New Year. Smaller capitalization stocks fared better than their mega-cap counterparts in January, as the AlphaShares Small-Cap index (ACNSCTR) gained 5.92% versus the FTSE China 25 Index increase of 4.41%. This continues the trend in 2012 that saw the two indexes gain 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, gained 6.77% in January. The index, which is mostly restricted from the international investment community (with the exception of those with government-approved qualified foreign institutional investment (QFII) quotas), has soared more than 27% since reaching a three-year low on December 3rd. A market is considered to have entered “bull market” territory once it recovers more than 20%.

The AlphaShares Chinese Volatility Index, or “CHIX” (Bloomberg: ASCNCHIX), closed January at 15.57, declining -20.15% during the first month of 2013. It had traded as low as 14.78 on January 23rd, marking its lowest level since January 2006. The resolve of the ‘fiscal cliff’ in the US was a huge sigh of relief to global equity markets to start the month, and the positive economic data out of China that followed also encouraged investors about the global economic recovery.

Sector wise, following a year that saw all sectors recording positive gains for the 2012 year, and all but one posted positive returns for the opening month of 2013. Telecommunications was the only group to decline in January, falling -4.11%. China Mobile (941 HK) was the largest detractor to index returns, as it fell -5.60% this month. The AlphaShares All-Cap Index puts a modified-market-cap maximum weight on all of its index constituents at 5%, whereas some indexes like the FTSE China 25 Index fund holds this name at over 9%. On January 23rd, a government official from the Ministry of Industry and Information Technology (MIIT) announced it is considering adjusting a plan that will allow privately-owned companies to enter the mobile telecommunications sector. The pilot program aims to allow private capital to further enter the telecom industry and give full play to the flexibility and creativity of private firms, as well as promote market competition and improve mobile telecom services. At present, China’s mobile telecom sector is dominated by the state-owned companies China Mobile, China Unicom (762 HK), and China Telecom (728 HK). The latter two stocks traded mixed, returning 0.26% and -2.15% respectively.

On the other side of the sector return spectrum, Utility stocks were the best January performers (+9.64%), followed by Information Tech (9.34%) and Financials (7.35%). Thirteen of the top 20 positive contributors to index returns this month came from the financial sector. Commercial banks and insurance companies have surged since 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. The Bank of China (3988 HK) was the largest positive contributor to index returns, gaining 10.34% this month. The bank aims to increase profit contribution from its Hong Kong operations to 30%, a pace set to the expected organic growth anticipated to be generated from its unique offshore renminbi clearing business.

China Longyuan Power Group (916 HK), the largest wind-energy developer in China, led utility stocks higher, gaining 21.2% in January. A Bloomberg New Energy Finance report showed that China accounted for more than a third of all newly installed onshore wind power capacity last year, installing 15.9 gigawatts of onshore turbines (versus a record 13.2 gigawatts for the US in 2012). Wind energy has become the nation’s 3rd-largest energy resource, following coal and hydropower, and generates 3% of its total electricity.

Sincerely,

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.