|AlphaShares Indexes||June 2010||2010||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||0.56%||-5.42%||12.33%||2.19%|
|AlphaShares China Small-Cap Index (NYSE HAO)||-0.50%||-7.71%||17.96%||-4.23%|
|AlphaShares China Real Estate Index (NYSE: TAO)||3.41%||-9.66%||0.63%||-3.15%|
|FTSE/Xinhua China 25 Index||2.39%||-6.23%||6.13%||-0.36%|
|CSI 300 (A-Shares)||-6.95%||-27.84%||-18.48%||-8.56%|
China’s central bank ended a two-year currency peg to the US dollar just prior to the G20 summit in Toronto, which should increase Beijing’s monetary flexibility, while reducing trade tensions between China and its global partners. In addition, the yuan appreciation could also boost Chinese consumers’ buying power, as the government continues to strive to rebalance its economy from being one dependent on exports to one that can also depend on internal domestic consumer demand. Both the stabilization of the currency (and likely appreciation) and the diversification of the local economy are helping to reduce some of the perceived risks of China’s local equity market.
The AlphaShares Chinese Volatility Index (“CHIX”), slipped -9.07% in June to finish the first half of 2010 at 27.61, after starting the year at 24.22. As measured by implied volatility, the “fear” level in China H-Shares markets is 20% less than that of developed markets, as the VIX (CBOE S&P 500 Volatility Index) and V2X (Dow Jones Euro Stoxx Volatility Index) finished the first half of 2010 at 34.54 and 34.32 they had started the year at 21.68 and 24.06 respectively.
The China Securities Regulatory Commission, announced that the total value of the Shanghai and Shenzhen markets surpassed $3.07 trillion USD, making the country the world’s third largest stock market. Yet many global indexes rank China no higher than 9th due to index-imposed float adjustment factors.
The AlphaShares China All-Cap Index (ACNACTR) gained 0.56% in June, bringing its return of the first half of 2010 to -5.42%. Large-cap (as measured by the FTSE Xinhua Index, which measures the 25 largest Chinese companies by market cap) outperformed small-cap (AlphaShares Small-Cap index) in June: 2.39% to -0.50%–switching its YTD relative return to an outperformance: -6.23% to -7.71% respectively.
CNOOC (883 HK) and China Mobile (931 HK) were not only top performers in China markets, but had the largest positive contribution to the entire Emerging Market index in June. CNOOC (5.03% of the ACNACTR) gained 7.38% this month on the prospects that a stronger yuan will lower costs of purchases overseas. China’s state-owned oil firms have spent $9 billion in overseas acquisitions so far in 2010, with plans of further expansion expected to significantly boost the country’s oil output and reserves. In addition, and furthering the warming of cross straight ties, CNOOC’s parent firm, China National Offshore Oil Corporation signed an initial agreement to collaborate with Taiwan’s state oil refinery, the CPC Corporation (unlisted).
China Mobile (5.50% in the ACNACTR), the world’s biggest phone carrier by market value, gained 6.10% this month. Rising labor costs in China have started to attract more attention over the past few months, and it is expected that wage increases for semi-skilled and migrant workers in China combined by the promotion of rural consumption by the government should boost spending on telecommunications services which was the largest positive contributing sector to index performance, returning 6.52% this month. The Consumer Discretionary and Consumer Staples sectors comprise less 6.34% and 5.89% of the ACNACTR index respectively.
Technology was the worst performing Chinese sector in June, as the AlphaShares Technology Index (ACNITTR) slipped -5.21% this month. After being the largest positive contributor to Chinese equity for the prior three months, Baidu (BIDU US) was the second largest negative contributor in June, falling -7.01% (Tencent Holding (700 HK) was the largest, declining -13.12%). Rival search engine Google (GOOG US) resubmitted an application to the Chinese government for an Internet Content Provider license based on a new approach for allowing people to access its search engine. In March, Google closed its China search engine and began automatically directing users to the unfiltered Hong Kong site, after saying it would no longer self-censor search results.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|