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AlphaShares Monthly Letter: November 2009

AlphaShares Indexes November 2009 2009 1 Year 3 Year
AlphaShares China All-Cap Index 2.79% 70.61% 89.40% 17.39%
AlphaShares China Small-Cap Index 7.15% 100.09% 134.36% 7.96%
AlphaShares China Real Estate Index -2.18% 79.40% 95.28% 7.96%
FTSE/Xinhua China 25 Index 1.30% 55.99% 68.34% 13.55%
CSI 300 (A-Shares) 7.05% 93.07% 92.13% 32.97%

China Equity Markets:

The AlphaShares China All-Cap Index gained +2.79% in November. On November 17th, the index hit its highest level since June 2008. The Consumer sectors led index returns as Consumer discretionary and Consumer staples gained 14.74% and 13.89% respectively. Ctrip.com (CTRP UN) was the best performing index stock, gaining 37.00%. China’s State Council, the nation’s cabinet, approved plans to encourage the development of the country’s tourism industry. The plan includes the entry of foreign tourism countries into the Chinese market, the restructuring of state-owned enterprises, and supporting the development of privately owned businesses. Ctrip reported better-than-expected earnings and closed the month at an all-time high.

Despite a Bank of China (3988 HK) spokesperson reiterating that it does not have any exposure to Dubai World nor does it hold any securities linked to Dubai’s government and state backed agencies, the stock weighed the most on China equity market returns last month, falling -4.58%. The nation’s 3rd largest lender said it is studying “various options’ to replenish capital, with fears of a dilution of earnings for current shareholders should they issue additional shares. The bank has doled out more new loans than any other Chinese lender.

China Life Insurance (2628 HK) gained 6.16% on an upgrade by Moody’s Investors Services from stable to positive. The rating agency noted that the Ministry of Finance’s 68.40% effective ownership essentially makes the company a government-related issuer. Moody’s believes that the Chinese government will likely support China Life in a stress situation, and that the A1 rating reflects the company’s “exceptional market position, and strong and stable profitability’.

The Hang Seng Indexes flirted with its 23,000 mark—a level not seen since July 2008. However, both declined towards the end of the month amid concerns over the debt crisis in Dubai. HSBC Holdings (5 HK) is among the global banks with the largest exposure to the UAE, with loans to the region totaling approximately $15.9 billion. While not in the AlphaShares All Cap Index, HSBC makes up almost 14.9% index weight of the Hang Seng, which traded as low as 21,134.5 following the news. It finished the month at 21,821.5 – for a gain of +0.57% in November.

Most major index providers currently classify HSBC (HSBA LN) as a company domiciled in its Great Brittan country index. However, the London-based Bank is returning its focus to Asia, as it looks to benefit from the rapid growth in China and other nearby emerging markets. As its first step, CEO Michael Geoghan, plans to relocate to Hong Kong from London in February along with the bank’s head of strategy and other top directors. (The bank had moved its headquarters to London from Hong Kong in 1992, as it decided to expand into the US and Europe; possible reclassification of the country by the index may follow).

The AlphaShares Chinese Volatility Index, or “CHIX’ (Bloomberg: ASCNCHIX), hit a 28-month low of 27.10 on November 23rd, and then spiked up to finish the month at 32.55 in reaction to the news of Dubai World saying it would ask its creditors to restructure its debt. Financial stocks suffered the brunt of the late-month selloff as investors scrambled to gauge exposure to the region among the global banks. Financials make up over 64% of the Hang Seng Index and over 47% of the FXI assets, compared to less than 15% of the S&P 500 Index. While both volatility indexes ticked up from their lows to end the month, both were lower than their October 31st levels, reflecting a generally diminished level of fear in the markets. The CBOE S&P 500 Volatility Index, the VIX, declined 20.14% to 24.51, while the CHIX fell only 5.98% during the month—largely due to the Dubai overhang facing the heavily weighted financial sector.

China News/Highlights:

The ruling Communist Party announced that China would stick to its “appropriately’ loose monetary stance and active fiscal policy as it continues to implement stimulus measures in 2010 to cushion the fallout from the global financial crisis. Premier Wen Jiabo warned on a televised address that countries should not unwind stimulus prematurely.

Taiwan and China signed agreements to widen access to each other’s financial companies, as relations reached their warmest levels since a civil war ended in 1949. The accord meets China’s objective of deepening economic ties with the island that the government in Beijing claims as part of its territory; while the deal agreement enables Taiwanese banks to accelerate expansion in the world’s fastest-growing economy. The two sides agreed on issues including cross-strait financial supervision, information sharing and risk management.

On November 11th, China reported that industrial production accelerated faster than expected to 16.10% from 13.90% in September, translating to a 1.30% month-on-month increase in October. The report measures the balance of goods demand from net exports, inventory accumulation, consumption, and fixed investment.

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

Disclaimer text

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