|AlphaShares Indexes||May 2010||2010||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||-5.48%||-5.94%||15.69%||5.74%|
|AlphaShares China Small-Cap Index (NYSE HAO)||-10.11%||-7.24%||19.70%||-2.67%|
|AlphaShares China Real Estate Index (NYSE: TAO)||-5.91%||-12.64%||-1.20%||-3.30%|
|FTSE/Xinhua China 25 Index||-6.03%||-8.41%||8.64%||3.01%|
|CSI 300 (A-Shares)||-9.62%||-22.45%||0.48%||-7.53%|
In an event that has not happened since May of 2005, the AlphaShares Chinese Volatility Index (Bloomberg: ASCNCHIX), finished lower than the CBOE S&P 500 Volatility Index (VIX) eleven days this month, highlighting the levels of volatility that gripped the developed markets during what was a very tumultuous month. The CHIX climbed 19.76% to finish May at 30.36, while the VIX spiked 45.44% to close the month at 32.07. In Europe, the VSTOXX Index (V2X), based on the Euro Stoxx 50 Index volatility jumped 19.06% to 34.40. They had started the year at 24.22, 21.68, and 24.05 respectively.
Traditional roles appear to have been turned on their heads, as Germany, a larger ‘developed’ country, announced its ban on naked short selling on May 19th, a move that impedes investor ability to hedge against losses in risky assets. Meanwhile, the China Financial Futures Exchange began trading futures on its CSI 300 Index, which tracks 300 of the largest companies on China’s two local equity exchanges, on April 16th, after allowing margin trading and short selling beginning on March 31st. At the end of the US-China Strategic & Economic Dialogue in Beijing, the US Treasury Department announced a proposal that would see China allow qualified foreign institutional investors, or QFIIs, to participate in trading the newly available stock-index futures.
The AlphaShares China All-Cap Index fell -5.48% in May to bring its YTD return to -5.94%. Meanwhile, the large-cap dominated FTSE Xinhua Index fell 6.03% this month and is down -8.41% so far in 2010. The AlphaShares China Small-Cap index dropped -10.11% in May to bring its YTD return into the red at -7.24%.
Markets sometimes look to emerging markets for concern during crisis; however in May, it looked to the largest EM economy as a source of comfort. After China denied a report saying it is reviewing its holdings of Eurozone debt on May 27th, global equities rallied 2.87% as investors were reassured that China remains a long-term investor in Europe. However, it was still a tough month overall, as the MSCI ACWI declined -9.90% in May.
Richard Yorke, CEO of HSBC, went so far to say that the financial crisis over the past two years has left China even stronger, with exporters becoming leaner and more efficient. The mix of loans that HSBC is offering is shifting away from manufacturing, and towards retailers, property developers and companies selling consumer goods as China moves into the next phase of its development towards a more balanced economy.
Sovereign debt across the globe continues to be scrutinized as investors are starting to look at country’s balance sheets as they would a company’s and those with higher debt are going to trade at a higher volatility than those with less, all else being equal. When you look at China’s balance sheet, the $2.4 trillion in currency reserves certainly comfort investors looking at the current liquidity formulas. While the Debt-to-GDP ratios of the US and the major European countries are at 50% or higher, China’s ratio is less than 20%. The nation’s budget situation both deficit and debt outstanding remains the best of any major nation in the world. Whereas many ‘developed’ nations have already fired their bullets at global credit crises, China has further flexibility to act if needed.
After leading China sector returns in April, Health care stocks turned -15.84% in May to be the worst performers. The financial sector was the best performer, falling -4.03%. On the opening day of the month, the People’s Bank of China (PBOC) raised its required reserve ratios (RRR) 50 bps, its third increase this year. On the closing day of the month, China’s State Council said on its website that it has approved the economic planning agency’s plan to gradually reform the country’s real-estate tax, which is expected to be the dominant form of property tax that China will introduce for homeowners. The AlphaShares China Real Estate Index fell -5.91% and is down -12.64% YTD.
Baidu (BIDU US) was the largest positive contributor to index returns for the third month in a row (+6.21% in May) and the largest so far in 2010 overall (+78.03% YTD). The Chinese search giant split its stock 10 for 1 on May 12th. Coming into the year, the company had about a 58% shareof the Chinese Internet search market. Since Google (GOOG US) decided to move its servers out of mainland China and announced in March that it would stop censoring its search results in the country, Baidu has gained an additional 6% of the market in Q1.The AlphaShares Technology Index (Bloomberg: ACNITTR) fell -9.80% in May, and is down -4.10% YTD.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|