|AlphaShares Indexes||November 2010||2010||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||-2.43%||9.62%||10.35%||-5.16%|
|AlphaShares China Small-Cap Index (NYSE HAO)||0.40%||18.77%||21.86%||2.13%|
|AlphaShares China Real Estate Index (NYSE: TAO)||-1.76%||8.16%||9.98%||-6.09%|
|FTSE/Xinhua China 25 Index||-2.56%||2.57%||1.42%||-8.85%|
|CSI 300 (A-Shares)||-7.11%||-9.63%||-7.98%||-9.57%|
Moody’s investor service, one of the world’s leading ratings agencies, upgraded China’s country bond rating from A1 to Aa3 on the economy’s resilient performance and expectations of continued strong growth and macroeconomic stability. The government’s financial strength was one of the important drivers of the rating upgrade as was the country’s effective policy response to the 2008 crisis. Senior Vice President Tom Byrne noted, “In particular, we premised our action on the ability of the Chinese authorities to protect systemic stability from the underlying threats arising for the extraordinary credit expansion evident in 2009.” Moody’s forecasts China’s economic growth to be between 9-10% this year, and 8-9% in 2011.
Meanwhile, China’s Dagong Global Credit Rating Company lowered its credit rating for the US to A+ from AA, citing a deteriorating intent and ability to repay debt obligations after the Federal Reserve announcement of further quantitative easing through $600 billion of purchases of US Treasuries. Analysts at Dagong, one of China’s five official ratings companies, said the credit outlook for the US is “negative” as the Fed’s plan to buy government debt will erode the value of the dollar and “entirely encroaches” on the interests of creditors.
Conversely, the US is rated Aaa by Moody’s and AAA by Standard Poor’s Corporation the highest ratings of the more widely followed companies based in New York. Dagong is seeking to become an alternative to S&P, Moody’s and Fitch Ratings, and ranks China’s debt higher than that of the US and Japan citing widening deficits in the developed world. Dagong Chairman Guan Jianzhong said the global ratings methodology is “irrational” and “cannot truly reflect repayment ability.”
The AlphaShares China All-Cap Index (ACNACTR) hit a 35-month high on November 8thth, but ended the month down -2.43%joining a mild sell-off in global equity markets whose anxieties peaked over sovereign debt anxieties and worries about Chinese inflation. Smaller cap stocks weathered the small storm as they were able to squeak out a 0.40% gain, as measured by the AlphaShares Small-Cap index (ACNSC) outperforming their larger capitalized counterparts as the FTSE/Xinhua China 25 Index slipped -2.56% during the month. After some unwarranted complacency in the options markets in November, both the AlphaShares Chinese Volatility Index (CHIX) and the CBOE S&P 500 Volatility Index (VIX) gained over 11% in November to close the month at 25.22 and 23.54 respectively.
Stronger than expected economic data, including Chinese manufacturing growth, helped push localequity markets to their 2010 highs early in the month while confirming the local economy’s growth momentum. China’s manufacturing expanded at the fastest pace in six months in November indicating the economy can bear more gains in the yuan and interest rate increases to cool pricing pressure. However, the spotlight turned to the November CPI inflation number that was higher than expected later that month, coming in at a 25-month high of 4.4% year-on-year. As a result, the People’s Bank of China (PBOC) hiked its required reserve ratio (RRR) twice in November to manage liquidity and contain loan growth.
After Chinese financials gained a sector best +8.16% in November, they reverted back in November, falling -4.59%. China Construction bank (939 HK) and the Bank of China (3988 HK) weighed the most on index returns, falling -5.31% and -10.50% respectively. Meanwhile, Energy was China’s best performing sector, up 0.94% this month. China’s largest offshore oil producer CNOOC (883 HK) had the highest positive contribution to index returns, gaining +4.68% in November. Moody’s investor service also raised its rating on China’s National Offshore Oil Corporation to Aa3, its fourth highest ranking while citing a “stable” outlook for the company.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|