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AlphaShares Monthly Letter: May 2011

AlphaShares Indexes May 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) -0.72% 6.39% 22.87% 3.73%
AlphaShares China Small-Cap Index (NYSE HAO) -2.42% -2.51% 22.15% 8.85%
AlphaShares China Real Estate Index (NYSE: TAO) 1.06% 1.07% 28.05% 2.60%
AlphaShares China Technology Index (NYSE: TAO) -6.78% 8.72% 21.65% 14.79%
FTSE/Xinhua China 25 Index 1.08% 5.66% 17.63% -1.49%
CSI 300 (A-Shares) -5.62% -2.15% 12.61% -4.20%

China News:

While China and US officials continued to discuss the same issues without resolve at the recent Strategic & Economic Dialogue (S&ED) (see below), there was progress at a two-day summit in Tokyo between leaders Chinese Premier Wen Jiabao, Japanese Prime Minister Naoto Kan and South Korean President Lee Myung-bak on agreeing to speed up preparations of a possible three-way free-trade pact. As the path to any trade arrangement is fraught with difficulties (including recent disputes over territories, the export of rare-earth elements, banned Japanese food, not to mention historical, political, and economic rivalries), the three countries have stepped up talks given a shared desire to "strengthen cooperation to boost the region's vibrancy and dynamism and lead Asia's strong growth."

At the third annual S&ED, US Treasury Secretary Geithner continued to grumble about currency inflexibility and undervaluation of the yuan, while China Deputy Finance Minister Zhu continues to only acknowledge the differences in view and speed of the currency's appreciation. Despite continued noise between the two countries about the rate of appreciation, the yaun continues its ascent, closing May at its best rate since 1993: 6.4786 CNY/US. The yuan's 0.21% appreciation during the month brought its 2011 appreciation versus the US dollar so far to 1.98% YTD. With a depreciating US dollar, strong local currency performance enhances US investor returns in international equities.

China Equity Markets:

The AlphaShares China All-Cap Index (Bloomberg: ACNACTR) fell -0.72% in May, bringing its YTD return to 6.39%. Small cap stocks (represented by the AlphaShares Small-Cap index: ACNSCTR) underperformed their megacap stocks peers (measured by the FTSE China 25 Index). The returned - 2.42% versus 1.08% this month, and -2.51% and up 5.66% year to date respectively. With Chinese large cap names trading range-bound over the past month, The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), declined -1.75% in May to close at 17.70 - just above its May 30th close 17.24, its lowest level in 55 months.M

China Unicom (762 HK) and China Shenhua Energy (1088 HK) were the two largest contributors to positive returns for both benchmark indexes this month. China Unicom (762 HK) is the country's 2nd largest mobile-phone company and gained 22.46% in May and traded at its highest levels in three years. At its annual shareholder meeting on May 24th, President Lu Yimin predicted that demand for the iPhone will help Unicom exceed its target of adding 25 million customers for its 3G, or thirdgeneration, services this year. The company was the first company in China to offer the iPhone in 2009.

China Shenhua Energy, a unit of the country's biggest coal producer, gained 6.48% and finished the month at its highest level since January 2010. Benchmark power-station coal prices rose for a seventh straight week. China raised electricity prices for businesses for the first time in more than a year. Officials say China may face the most ever power shortages in its history this summer. The increase in electricity costs may complicate China's battle against inflation, which is above the government's target. China Central Television reported that the increase will "indirectly" affect the Consumer Price Index by 0.05%.

China's consumer price index (CPI) inflation rate fell slightly to 5.3% in April, easing from its 32- month high of 5.4% in March, but still well above Beijing's official 4% target for 2011. The country's producer price index (PPI) rose 6.8% year-over-year in April, lower than March's 7.3%. The People's Bank of China (PBoC) increased its reserve requirement ratio (RRR) for banks by 50 bps on May 12th, its fifth time this year. The move by the central bank will lift the RRR for China's large financial institutions to a record high of 21% - meaning banks will have to lock up 21% of their deposits as reserves. The PBoC also announced stricter liquidity requirements for Chinese banks than the Basel standards, as a way to combat against frivolous lending in an economy that the United Nations expects to grow at 9.1% in 2011. The UN also raised their forecast growth for the world economy to 3.3% this year. (BIDU US) was the largest negative contributor to index returns this month, falling -8.63%. Sector wise, technology was the worst contributor to index returns, falling -6.78% in May. However, the stock is up 40.59% so far in 2011, and the sector has gained 8.72% YTD.

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

Disclaimer text

Past performance is no guarantee of future results. The information presented in this letter is for background purposes only and is subject to updating, revision and amendment, and no representation or warranty, expressed or implied, is made, and no liability is accepted by AlphaShares, LLC in relation thereto. This letter is neither an offer to sell nor a solicitation of any offer to buy interests in the Fund. Any such offering is made only pursuant to the Fund’s Private Placement Memorandum and subscription agreement, which should be read in their entirety. No offer to purchase shares in the Fund will be accepted prior to receipt by the offeree of the aforementioned documents and completion of all appropriate documents. These materials have been sent to you in a confidential manner. The information contained herein may be proprietary. No part of these materials may be reproduced in any manner without the Investment Manager’s prior consent.