|AlphaShares Indexes||June 2012||2012||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||1.30%||3.08%||-17.71%||2.94%|
|AlphaShares China Small-Cap Index (NYSE HAO)||-1.58%||2.03%||-26.95%||0.61%|
|AlphaShares China Real Estate Index (NYSE: TAO)||7.47%||21.93%||-5.82%||4.20%|
|AlphaShares China Technology Index (NYSE: TAO)||-1.18%||3.59%||-21.91%||8.15%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||0.60%||0.86%||NA%||NA%|
|FTSE/Xinhua China 25 Index||1.95%||-1.66%||-18.86%||-1.96%|
|CSI 300 (A-Shares)||-5.31%||5.45%||-16.36%||-5.45%|
The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), closed June at 21.76 - trading down considerably during the month after hitting a six-month high of 31.10 on June 4th. The Chinese "fear gauge" was down -21.25% in June and is down -17.51% year-to-date as Chinese government takes great strides in addressing slowing economic growth.
The big catalyst in global volatility coming so strong this month came from Europe. The pro-austerity party won the second-round of elections in Greece on June 17th, and the end-of-month European Union summit provided clarity towards its plan for a single supervisory mechanism for local banks headed by the European Central Bank. However, there were plenty of happenings in China that stemmed optimism in the local options markets (as per above). Whereas 'Don't fight the Fed' is a popular investment adage in the US, 'Heed to the Premier' is becoming a directional trade in the Chinese equity markets.
During a trip to central China in May, Prime Minister Wen Jiabao declared that the government should give 'more priority to maintaining growth'. Shortly thereafter, the government began to back his words with deeds: speeding the approval of infrastructure projects, permitting three huge investments in steel plants, increasing financing for public housing, $5.7 billion of subsidies for energy-saving household appliances, and ongoing efforts to increase bank lending.
While these efforts were certainly appreciated, global investors really took notice on June 7th when the People's Bank of China cut its key rate for the first time since December 2008. The one-year lending rate was lowered 25 bps to 6.31% as the central bank steps up its efforts to bolster a economy that has seen its weakest growth since the financial crisis - yet growth still projected to top 8% annualized. Elsewhere in many parts of the world, political words and government action can often be inconsistent. However, when the number one political leader in China speaks, the government follows suit with its efforts.
As equity market performance and changes in implied volatilities tend to be negatively correlated, it was not surprising to see equity markets rebound as volatility came off and fears in the global markets were relieved during the month. The AlphaShares China All Cap Index (Bloomberg: ACNACTR) added 1.30% in June, bringing its YTD return to 3.08%. Large cap names fared better than their small cap peers, as the former (represented by the FTSE China 25 Index) gained 1.95% and the latter (represented by the AlphaShares Small-Cap index: ACNSCTR) fell -1.58%. - bringing YTD returns to -1.66% and 2.03% respectively so far in 2012.
Interest-rate sensitive Utility stocks benefitted the most from the PBoC's surprise cut this month, as the sector gained 8.96% in June. Also assisting local utility share prices was a demand surge of 5.2% yearover- year (compared to 3.3% the month prior). Healthcare was the next-best sector, gaining 6.21%. However, both of these make up the smallest sectors in the Chinese equity markets with weights of 2.30% and 1.97% respectively.
Jim O'Neil, credited for coining the "BRICS" term to describe the world's future powerhouse economies, commented that he is more concerned with slowing Brazilian growth and India's policy paralysis than he is by China, which he says remains on track to become a more consumer-led economy. While economic growth in China is slowing, he keeps the following perspective, "The idea that countries always grow at ridiculous rates was never the case. The fact that they've been disappointing for one or two quarters is neither here nor there." He remains "relatively sanguine" that his world view is intact, and that the BRICS nations will join the US and Japan as the world's largest economies.
While China grew at a below-expected rate of 8.1% in Q1, officials remain committed to their minimum growth target of 7.5% for the year as evident by the monetary loosening. In addition, with a relatively low fiscal deficit to GDP ratio, the government also has room to adapt more proactive fiscal measures if needed. At a 7.5% floor, economic growth in "emerging" China remains the envy of the developed world.
Interesting happenings in the options trading markets include calls in the FTSE China 25 Index options market dominated trading in June as 1,577,069 contracts changed hands - marking the most calls traded in a month on the contract since 2,121,456 in December 2007. Whereas the FXI's monthly put/call ratio averaged 1.34 for the first five months of 2012, traders reversed course dramatically adding bullish positions as the ratio traded at an unusually low 0.59 in June, meaning that only one put contract traded for every 1.69 calls this month - as optimism abounds as options traders take notice of pro-growth government policies being implemented to address any slowdown.
Despite all the talk of a "Chinese Real Estate Bubble", the AlphaShares Real Estate Index (ACNRET) continues to chug along, gaining 7.47% in June. The Chinese government seems persistent in cooling local real estate prices, and one of its preferred methods is to increase the supply of housing. Real estate management and development companies make up 91.85% of the index, and have benefited immensely from such pro-building policies. The index is up 21.93% so far in 2012.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|