|AlphaShares Indexes||July 2010||2010||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||5.54%||-0.18%||6.45%||0.57%|
|AlphaShares China Small-Cap Index (NYSE HAO)||8.80%||0.42%||10.56%||-2.99%|
|AlphaShares China Real Estate Index (NYSE: TAO)||8.93%||-1.60%||-0.90%||-3.83%|
|FTSE/Xinhua China 25 Index||-2.51%||-3.87%||-1.40%||-2.57%|
|CSI 300 (A-Shares)||12.58%||-18.76%||-22.17%||-10.27%|
Second quarter GDP in China slowed to 10.3% year-on-year, after coming in at 11.9% annualized growth in the first quartergiving more confidence to investors that the central government is indeed tapping rather than slamming the brakes on the economy. Over the July 5th weekend, Chinese Premier Wen Jiabao pledged that the government would pursue policies that will ensure ”steady and relatively fast growth” for the economy. He also vowed to make ”policy stability” the main theme of the second half of this year.
On the inflation front, June headline CPI rose at a slower-than-expected 2.9% year-on-year versus 3.1% in May. The combined slowing economic growth momentum and dissipating inflation is believed to spur the government to ease its policy tightening. China authorities also emphasized adjusting economic growth towards consumption, which marked a slight change from its previous focus on managing inflationary expectations.
The AlphaShares Chinese Volatility Index (CHIX) declined -24.23% to finish July at 20.82, its lowest level since April 2007. Volatility has entered its summer slumber as traders on both sides of the Pacific hit the beaches in lieu of the options trading pitsas options averaged 1,856,000 contracts per month for June and July versus 3,093,000 for the two months prior.
In addition to summer vacations, implied volatility declined on some fundamental factors. In Hong Kong, more than 70% of the H-Shares companies reported earnings, a catalyst event sought by options traders. Earlier summer concerns focused on a possible ”double dip recession” have dissipated as global investors become more comfortable in accepting slower and steadier economic growth.
The AlphaShares China All-Cap Index gained 5.54% in July to bring its YTD return to almost flat at just -0.18%. Chinese small capitalization firms (as measured by the AlphaShares Small-Cap index) outpaced their larger capitalization counterparts (as measured by the FTSE/Xinhua Index), returning 8.80% versus 2.51% this month to bring their respective YTD returns to 0.42% and -3.87% respectively. On the mainland, the A-Shares markets (as measured by the CSI 300) posted a 12.58% return in July, but are still down -18.76% so far on the year.
After being the worst performing sector in June, Technology was China’s best performing this month. Baidu (BIDU US) and Tencent Holdings (700 HK) are the two largest tech stocks in the AlphaShares All-Cap Index with weights of 3.53% and 2.59%, and they had the most contribution to overall index returns gaining 19.58% and 15.03% respectively. The China Internet Network Information Center (CNNIC) announced first half statistics for 2010, reporting that total internet use in China at the end of Q2 increased 24.3% to 420 million. Online gaming continues to be one of the most popular applications with 71% of internet users playing games, while 76% used internet search engines.
Tencent has a 27.2% market share in the online game industry, whose sales revenues are projected to gain over 30% year over year in 2010. Meanwhile, Baidu gained advertisers from Google after the US company shut its China-based search site in March and redirected local users offshore to avoid censorship rules in the world’s largest online market. The changes in Google’s China site caused increasingly bad user experiences, and have allowed Baidu to gain users. Baidu accounts for 70.8% of China’s search engine market by revenue in Q2, compared to its 67.8% share at the end of Q1. By comparison, Google’s market share dropped from 29.5% in Q1 to 27.3% in Q2.
The AlphaShares China Real Estate Index gained 8.93% in July. China Overseas Land & Investment Ltd (688 HK) is the largest Hong-Kong traded Chinese developer by market value and gained 13.67% in July. Meanwhile, China Construction Bank (939 HK) was up 4.23%, as the two stocks were the 3rd and 4th largest positive contributors to China index returns in this month. Market fears have eased as international investors respond to signals that the central government is retreating from moves made earlier in the year to cool the local economy particularly directed at property prices and bank lending.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|