|AlphaShares Indexes||March 2010||2010||1 Year||3 Year|
|AlphaShares China All-Cap Index||5.73%||-0.55%||64.49%||12.36%|
|AlphaShares China Small-Cap Index||6.69%||3.52%||102.02%||5.01%|
|AlphaShares China Real Estate Index||6.47%||-0.96%||75.46%||3.64%|
|FTSE/Xinhua China 25 Index||6.14%||-2.11%||50.68%||8.37%|
|CSI 300 (A-Shares)||1.95%||-6.42%||33.54%||10.85%|
The AlphaShares China All-Cap Index increased 5.73% in March as the large-cap FTSE/Xinhua and local A-Share CSI 300 rebounded 6.14% and 1.95%, respectively, this month following February&rsquos correction. Year-to-date returns fell as low as -11.65%, -12.04%, and -12.01% in the middle of first quarter before a strong March improved the YTD returns to -0.55%, -2.11%, and -6.42%, respectively. The AlphaShares China All-Cap Index received a boost from holding small cap names, which returned 6.69% in March, and brought 2010 returns into the black +3.52%.
On March 17th, the World Bank recommended higher interest rates and a stronger currency for China as it raised growth forecasts for 2010 to 9.5% from the 8.7% it projected in November. China&rsquos manufacturing expanded at a faster pace in March, putting additional pressure on the government to consider the World Bank&rsquos recommendation to allow appreciation in the yuan for the first time since mid-2008. China is facing renewed arguments urging it to loosen controls on the currency to help offset global trade imbalances, most notably from the US, which says an undervalued yuan gives Chinese exporters an unfair advantage.
The month closed with both the Shanghai and Shenzhen Stock Exchanges launching their long-awaited trial program for margin trading and short selling. The rollout is meant to better prepare investors for the upcoming launch of A-Share stock index futures on April 16th. Despite long-term benefits such as price discovery and hedging, the initial impact is expected to be limited. Only six brokerages have been approved in the first batch of firms allowed to take part in the trial. The tools will expand options in the local market where, until now, taking bullish positions has been the only choice with little opportunity to hedge against a market decline. China had banned financial futures in the mid-1990s after a trading scandal involving bond futures nearly brought down the country&rsquos financial system.
All Chinese sectors except for telecom recorded positive returns over the past month, with the exception slipping -0.82%. China Mobile (941 HK) was the largest negative contributor to benchmark returns, -2.50% for the month on concerns that the world&rsquos largest phone company by market value may deviate from its main business. Chairman Wang Jianzhou plans to diversify into electronic commerce through a $5.8 billion investment in Shanghai Pudong Development Bank Company. China Mobile is 5.69% of the China All-Cap index.
Financials led Chinese sector returns, gaining 8.69% this month. Concerns over bank recapitalization had been a key drag on local financial stocks earlier in the year. However, there was a strong pickup in fundraising activities in March. The Bank of China and the Industrial Commercial Bank of China both announced plans to raise capital by issuing convertible bonds in A-shares, and by a limited amount in the H-Share market. Bank of China (3988 HK) was the largest positive contributor to the index, posting a 9.80% return in March. Industrial & Commercial Bank of China (1398 HK) gained 7.81%.
Consumer Discretionary was the second best performing sector this month, gaining 7.15%. The sector was given a boost by Focus Media (FMCN US; +18.34%), retail sports footwear and apparel maker Li Ning (2331 HK; +16.06%), and the automaker Minth Group (425 HK; +15.84%). On the consumption front, retail sales rose 17.9% from 17.5% in December. The government directed shift away from investment to consumption should help re-rate Chinese equities through reducing the risks from the investment-induced overcapacity issue.
Technology was the third best performing Chinese sector in March, returning 6.30%. BYD Company (1211 HK) was the best performing Chinese stock for the month, gaining 28.68%, as it reported that it more than tripled net income from the year earlier. Speculation continues to gather as the government drafts a subsidiary policy for new-energy vehicles to promote the development of the local car industry. In addition to selling battery-operated automobiles, the company manufacturers batteries for mobile phones, power tools, and other portable electronic devices. Warren Buffet&rsquos Omaha-based Berkshire Hathaway owns 10% of the company.
Tensions came to a boil in the dispute between Google and China. Baidu.com (BIDU US) gained an additional 15.10% in March, bringing it a 45.17% gain in the first quarter and making it the largest contributor to index gains YTD. The dominant Chinese search engine company has nearly two-thirds of the local internet search engine market share, and stands to gain more share as rival Google decides to stop censoring its content in the Chinese internet market.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|