|AlphaShares Indexes||November 2012||2012||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||0.87%||14.35%||15.79%||0.85%|
|AlphaShares China Small-Cap Index (NYSE HAO)||4.49%||16.41%||14.27%||-2.30%|
|AlphaShares China Real Estate Index (NYSE: TAO)||9.03%||51.64%||56.39%||8.70%|
|AlphaShares China Technology Index (NYSE: TAO)||0.47%||4.75%||1.62%||-3.08%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||0.67%||4.11%||3.39%||NA|
|FTSE/Xinhua China 25 Index||1.09%||11.00%||14.12%||-2.42%|
|CSI 300 (A-Shares)||-4.94%||-5.73%||-11.19%||-12.01%|
The conclusion of China’s 18th National Congress confirmed to many that there would be no substantial change in the country’s economic policy. Li Keqiang will succeed Premier Wen Jiabao, while Xi Jinping will succeed Hu Jintao as president in March 2013. The international community was also assured as the ruling Communist Party pledged to promote freer movement of capital in and out of the country for investment purposes, and to make the exchange rate more market based. The Chinese yuan appreciated 0.17% this month, climbing to a 19-year high. YTD, the yuan has appreciated 1.10% against the dollar.
China’s October economic numbers showed broad-based improvement in activity, suggesting the recent economic upswing is gaining traction. October Industrial production increased 9.6% over year ago (oya). In addition, October retail sales increased 14.5% oya and fixed investment expanded 20.7% oya. Also, China's official manufacturing purchasing managers' index (PMI) rose to a seven-month high of 50.6 in November from 50.2 in October. A PMI reading below 50 suggests slowing growth, while a number above 50 indicates accelerating growth. The People’s Bank of China (PBoC) shifted its policy towards easing midyear, and the data has shown that China's 3Q economic health is improving – indicating that Beijing's progrowth policies are starting to take effect.
The AlphaShares China All Cap Index (Bloomberg: ACNACTR) added 0.87% in November to bring 2012 returns to 14.35% so far this year. Small cap names fared better than their mega-cap peers, as the AlphaShares Small-Cap index (ACNSCTR) was up 4.49% versus the FTSE China 25 Index’s gain of 1.09% – bringing YTD returns to 16.41% and 11.00% respectively. However, the mainland A-Shares market (available to local investors, but restricted to international investors, with the exception of QFII quotas aside) continues to struggle, as the CSI 300 Index (SHSZ300) dropped -4.94% in November to trade at fouryear lows – as local investors choose to ignore improved economic indicators and increasingly desperate pleas from the country’s regulators that now is a “golden opportunity” to buy low. Year to date, shares of the Shanghai / Shenzhen stock market index is down -5.73%.
The Hang Seng A-H Premium Index (HSAHP) tracks the price premium of mainland A-Shares to their corresponding H-Shares listings in Hong Kong. Historically, it trades at a 20% premium, and has traded over a 100% premium back in January of 2008. Traditionally, A-shares traded in Shanghai & Shenzhen tend to be more expensive than the H-shares traded in Hong Kong due to a lack of investment options available to domestic buyers and restrictions that prevent them from easily investing overseas (QDII quotas aside). However, this relative-value index closed November at its lowest level in two years at 95.49 – meaning that the local A-Shares stocks are now at a “discount” to their international traded values. Sentiment on the mainland continues to get more and more depressed as the A-Shares market has lost nearly 2/3s of its value since its 2007 peak. Officials from the China Securities Regulatory Commission, (CSRC) have repeatedly lambasted short-term stock market speculation and turnover, and continue to plead to Chinese investors to buy-and-hold large cap high quality shares while arguing that the current price-to-earnings ratios (P/Es are less than 10x) indicate bargain prices.
The AlphaShares Chinese Volatility Index, or “CHIX” (Bloomberg: ASCNCHIX), fell -8.65% in November to 17.00 – its lowest level since November 2006. With China volatility off -35.56% from where it started the year, investors are getting more active in insuring their positions at much lower priced costs. In the FTSE China 25 (FXI) ETF options contract, the Put/Call ratio swung from 0.77 in October to 1.21 in November – meaning there were more than 20% more puts (defensive positions) that traded than calls (bullish positions) this past month, after the opposite was the case in the prior month by over 30%. Just because volatility is trading at pre-financial crisis levels, doesn’t mean investors have forgotten about the crisis and many are taking advantage of the cheap volatility by buying portfolio insurance.
In stock specific news, big technology names again weighed on China equity returns, as three of the biggest negative detractors from index returns came from the sector. Tencent holdings (700 HK) slumped -7.59% during the month as it reported that efforts to expand into new businesses hit margins and the number of fee-paying users for its internet services fell. Baidu.com (BIDU US) and NetEase (NTES US) also dragged index performance as they had the 2nd and 3rd most negative contributions to returns, dropping -9.67% and -18.78% respectively in November. On the month, the more diversified AlphaShares China Technology Index (ACNITTR) managed to gain 0.47%, to bring YTD returns to 4.75% overall.
On the other side of the sector-return return coin, Consumer discretionary was the best performer, gaining 6.09% this month. BYD (1211 HK), the Chinese carmaker partly owned by Warren Buffet’s Berkshire Hathaway, led sector returns surging 29.93% in November. China Development Bank agreed to provide financing to buyers of BYD’s electric buses and taxis so no down payment is needed if the purchase is for public transportation – hence promoting electric vehicles by reducing concerns related to pricing. In a separate announcement, the National Development and Reform Commissions approved additional subsidizing for alternative energy vehicles. Shanghai currently gives as much as $6,405 in subsidies for each electronic car, in addition to free vehicle license.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|