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AlphaShares Monthly Letter: March 2013

AlphaShares Indexes March 2013 2013 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) -4.35% -4.42% 3.56% 0.99%
AlphaShares China Small-Cap Index (NYSE HAO) -4.05% 1.01% 11.80% -2.06%
AlphaShares China Real Estate Index (NYSE: TAO) -4.87% -1.50% 31.16% 8.69%
AlphaShares China Technology Index (NYSE: TAO) -2.88% 5.02% -2.89% -3.71%
AlphaShares Yuan Bond Index (NYSE: TAO) 0.59% 1.97% 4.97% NA
FTSE China 25 Index -5.64% -6.89% 3.76% -1.64%
CSI 300 (A-Shares) -6.48% -0.71% 5.30% -5.80%

China News:

On the currency front, the Chinese yuan appreciated 0.12% in March to bring its 2013 YTD appreciation to 0.26%, closing the month on a 19-year high relative to the US greenback settling at 6.2143 CNY/USD. This follows appreciations of 1.03% in 2012, 4.96% in 2011, and 3.33% in 2010. Chinese regulators expanded a program allowing institutions to raise yuan offshore for investment in the mainland, a step that moves the nation closer to a freely traded currency. The expansion was announced as legislators met this month at the annual National People's Congress (NPC) in Beijing, during which a new generation of Communist Party leaders headed by Xi Jinping assume oversight of the world's second-largest economy. The party has pledged to make the currency rate more market-based and promote freer movement of capital in and out of the country for investment purposes.

Outgoing Premier Wen Jiabao said, "Reform and opening up are the fundamental forces that drive China's development and progress. We can continue to advance our cause only by adhering to reform and opening up." China's new rulers also reiterated at the NPC that the focus will continue to be on consumer-led growth to help narrow the gap between rich and poor, while taking steps to curb pollution - in order to help tackle the main triggers for social unrest in the giant nation.

China Equity Markets:

The AlphaShares China All Cap Index (Bloomberg: ACNACTR) followed its -4.23% February drop with a -4.35% decline in March - a considerable consolidation following its nearly 30% rally after hitting September 2012 lows. Smaller capitalization stocks fared better than their mega-cap counterparts in February, as the AlphaShares Small-Cap index (ACNSCTR) fell only -4.05% versus the FTSE China 25 Index drop of -5.64%. For the first quarter, small cap stocks remain in the black at 1.01%, while the mega cap stock index is down -6.89%; thus, continuing its 2012 trend of small cap outperformance that saw them return 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, slipped -6.48% in March to bring YTD returns into the negative at -0.71%.

The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), remained firm this month, closing March at 16.78, or up 0.72% over February. For the first quarter of 2013, the CHIX has declined -13.95%, despite its two equity indexes whose options constitute the CHIX calculation, the Hang Seng and FTSE China 25, trading off -8.70 and -1.58% over the first three months of the year. Typically, market performance and changes in implied volatilities tend to be negatively correlated, but this goes to show that one of the early stories of 2013 is how extremely complacent volatilities are trading in options markets across the globe. A second big story of the year is how much volatility in China has risen versus that of the US. The CHIX/VIX spread finished March at 32.13%, and averaged 33.94% during the month. The premium of "fear-in-China over fear-in-the-US" equity markets spread had averaged 20.29% in the previous 12 months, and even inverted at times when perceived risks in China was lower than that of the US.

The divergence in volatility noted above has also been evident in the equity markets, as the S&P 500 finished March at an all-time high, even surpassing its pre-financial-crisis level, and stocks in emerging markets remain off over -25% from their 2007 levels. Chinese equities, in particular, are pricing at only half of where they were pre-crisis, yet the CHIX and VIX are pricing as if the financial crisis never happened, even though we have had two very contradictory performances in equity markets since then.

Healthcare was the best performing sector this month, gaining 5.92%. Eight of the nine stocks represented in the all-cap index posted positive returns in March. The sector represents only 2.07% of the index, with Sino Biopharmaceutical (1177 HK) leading the charge, gaining 21.40% this month. The drug-maker reported a very strong Q4 for 2012 with both revenue (up 44% yoy) and earnings (up 36.4% yoy). The Shenzhen medical device maker Mindray Medical International (MR US) gained 6.20% after reporting 2012 was another record-breaking year as revenues for the company topped $1 billion ($1.06b) for the first time, an increase of over 20% from 2011. Utilities were the next best performing sector, up 4.80% in March. China Resources Power (836 HK) was the 3rd-largest positive contributor to index returns, while China Resources Gas Group (1193 HK) had the 3rd best return in the index, gaining 19.73% this month.

Want Want China Holdings (151 HK) was again the largest positive contributor to index returns for the second consecutive month, gaining 9.27% in March following its 5.64% return in February. The snack maker reported net income of $553.8 million for the fiscal year, a 32% increase. Meanwhile, China Life Insurance (2628 HK) was the largest detractor from March returns, as the stock slipped -13.82%. The Chinese financial sector was down -5.99% this month on concerns that new rules governing wealth-management products will hurt earnings.


Jonathan J. Masse, CFA Dr. Burton G. Malkiel
Senior Portfolio Manager Chief Investment Officer

Disclaimer text

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