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maintaining

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that those d

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ves in the South

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a free capital m

arkets through a

TABLE SELF

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erhaps there is a

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mstances in whic

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ether manufact

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ut also those of

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data aren’t the

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h China Sea sug

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progression of

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ch we find the

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of the populace

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the past year’s

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whole story. Al

mental dynamics

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PROGRsted for millenn

gest a youthful

apitalistic reform

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the Chinese ec

tion to classic m

t of lenses to res

tion of Russia. I

is Russian nati

cast, London, 10

Chinese state,

of World War II

n the South Ch

seems intent to

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and thereby fo

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nation testing

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annot exactly p

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conomy. Noneth

methodologies fo

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ional interest.”

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within the cont

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hina Sea, or imp

pursue any ma

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haos.

wever, while we k

a’s ongoing mod

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mental trends w

a

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the limits of its

vident misalloca

predict the timin

ent, we believe

heless, these ac

for capital mark

e risks they pres

rapped in a mys

e Churchill Socie

text of the pres

nd Sir Churchil

plementing unp

anner of goals it

ese goals includ

wer base of the

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ainland equity

know what the p

deration in mac

d by the ETFs w

was among the

COMMENTA

ys still very you

s global influenc

ations of capita

ng or nature of

that they will

ctivities are no

ket evaluation, i

sent.

stery inside an

ety London

sent geopolitica

ll’s observation w

precedented me

t deems in not o

de maintaining m

ruling class. As

ss success, perh

markets demo

published data

croeconomic gr

we have chosen f

primary driver

ARY: AUGUST 3

ng in the world

ce. And the pur

al, newly built b

f future equity m

be in the inte

ot consistent wi

investors must

enigma; but

al climate, is ce

well-suited to m

easures to supp

only the country

macroeconomic

s the country m

haps even work a

onstrates how m

suggest, we also

rowth, we have

for the Chinese

rs for our Inve

3, 2015

d. More

rsuit of

but still

market

erest of

ith the

review

ertainly

modern

port its

y’s best

c order,

matures,

against

market

o know

seen a

equity

stment

Committee’

sidestep the

We also un

impacts of

developmen

ongoing inc

actual redu

46% from

commoditie

sectors is do

China’s slow

and broade

world, inclu

valuation s

allocations.

adjust tactic

1 It is necessawho invest inexchange. Whrepresent abomore mature,particular wou

’s decision to tr

e recent turmoil

nderstand that

its gluttonous

nt of infrastruct

creases in suppl

ction thereof ha

a post-financia

es across five se

own substantial

wdown, therefo

r global growth

uding many of

upport generall

Nonetheless, w

cal allocations a

ry to distinguish thn Chinese equities, hile the number of out a third of the m

larger-cap companuld make “more rea

rade out of our e

l that rocked eve

China has been

hunger for infr

ture in China h

ly focused on m

as contributed t

al-crisis peak s

ectors (energy, a

lly from that nea

ore, is obviously

. As it happens,

the remaining

ly remains stro

we continue to

accordingly.

he Chinese marketsbut who don’t live

f individual equitiemarket cap of all Ch

nies. They also histasonable” a dramat

exposure to the

en the larger, m

n a primary co

rastructure have

as clearly been

meeting what wa

to a global comm

set back in Ju

agriculture, live

ar-term peak: 5

y being felt in th

the companies

Asian exposure

ong such that I

assess the imp

s in which we histoe there, define Chins on the mainlandhinese equities. Whtorically have beentic understatement

e Chinese equity

more stable Chin

ontributor to gl

e multiplied ac

a key contribut

as expected to b

modity decline t

une 2014. That

estock, industria

5%, 27%, 13%, 2

hose companies

tend to be more

es within the C

Innealta’s Inves

pact of evolving

orically have investna’s stock market b

d China exchanges hat’s clear in that d

n more reasonably .

y market on Jun

nese equities trad

lobal macroeco

cross the sector

tor to the comm

be continued gro

that has left the

t index tracks

al metals and p

22% and 19%, in

s directly and in

e heavily repres

Country Rotation

stment team re

g trends in com

ted from those thatby the nearly 150 Cis almost 20 time

distinction is that tpriced than their m

ne 17th, a decis

ding outside of

onomic growth

rs and downstre

modity super-cy

owth in Chinese

e S&P GSCI Tot

24 commodity

precious metals)

n that order.

ndirectly tied to

sented among m

n Portfolio. Am

emains comforta

mmodity and ot

t have made the mChinese companies that number, thethe Hong Kong sh

mainland counterp

AUGUST 3, 2

sion that allowed

mainland mark

more broadly,

eam within eac

ycle. A combina

e consumption

tal Return Index

y futures on ph

) and each of th

o commodities s

much of the deve

mong these expo

able with the p

ther markets an

most news lately. Mos listed on the Hone Hong-Kong-listed

hares reflect predomparts. This latest ep

2 2015

d us to

kets1.

as the

ch. The

ation of

and an

x down

hysical

he sub-

sectors

eloping

osures,

present

nd will

ost folks ng Kong d names minantly pisode in

3

Stocks foOne may ar

the broader

capital mar

governmen

disconnecte

rally as an

economic r

accelerated

to rein in m

provided am

Once the ti

gains were

progression

The motiva

confidence.

able to igno

rule, model

risk of inve

elevating th

r All and All frgue that the Ch

r economy, eve

rkets, in the vi

t’s involvement

ed from the rea

expression of th

eforms,” accord

expansion in m

margin balances

mple momentum

ide turned, the

a reflection of t

n.

ations for these e

. But, the gover

ore: through dir

l or public comm

esting in both m

he hurdle to entr

for Stocks hinese Commun

n if those polic

ews of Party le

t is obviously ch

al economy as a

he ongoing “ma

ding to the Peop

margin debt, det

s may have been

m for the decline

government lik

their reform wo

exercises in ove

rnment now has

rect action it wil

ment. Given the

mainland and off

ry, at least from

nist Party mostly

cies have resulte

eaders, are very

hallenged, not

a result of the P

acroeconomic s

ple’s Daily (via

tailed in Figure

n the initial trig

e to feed upon i

kely presumed i

rk and that they

ert control can in

s set a preceden

ll limit or deny

se added uncert

fshore Chinese

m our purview as

y has been effec

ed in the misal

y much part of

least by the fac

Party’s broad ran

support for Chin

The Financial

2, as investors g

gger for the dec

tself.

it had to interv

y still were very

n many ways be

nt that all inves

the proper func

tainties, there is

markets. These

s tactical opport

ctive in its interv

llocation of reso

f that desire fo

ct that the coun

nge of interven

na’s developme

Times). The ch

gambled on its

cline, with the e

vene in order no

y much in charg

e categorized as

stors—domestic

ctioning of the

s no denying th

e risks are diffic

tunists.

ventionist ende

ources. We now

or an orderly p

ntry’s capital m

ntions. The Part

ent strategy and

heerleading resu

continued rally

expansiveness o

ot to lose the n

ge of the nation’

s altruistic, inten

c and internatio

capital markets

at recent action

cult to quantify,

eavors as they re

w understand th

progression. He

markets are som

ty had encourag

d the intrinsic fo

ulted in a massi

y. The Party’s att

of the leverage

narratives that m

’s continued eco

nded to boost in

nal, alike—will

s as it sees fit, w

ns have heighten

but have the ef

elate to

hat the

ere, the

mewhat

ged the

force of

ive and

tempts

having

market

onomic

nvestor

not be

without

ned the

ffect of

4 AUGUST 3, 2015

A DISTINCTIVE CHALLENGE

Uniquely influential in geopolitical and macroeconomic matters, China seems at once boundless in its potential to create

investment opportunity and confounding in its ability to stymie otherwise appropriate analysis. Observations in regard to

potential gain must account for a range of risks specific to the country’s evolution. In the end, Innealta’s Investment Team

retains a cautious eye toward the Chinese equity market, while mindful both of the positive and the negative implications for

China’s dynamic role in and impact upon global markets.

IMPORTANT INFORMATION

The information provided comes from independent sources believed reliable, but accuracy is not guaranteed and has not been

independently verified. The security information, portfolio management and tactical decision process are opinions of Innealta

Capital (Innealta), a division of AFAM Capital, Inc. and the performance results of such recommendations are subject to risks and

uncertainties. For more information about AFAM Capital, Inc. please visit afamcapital.com. Past performance is not a guarantee of

future results.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar to those of stocks, such as market risk,

and investors that have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income

(bond) ETFs are subject to interest rate risk which is the risk that debt securities in a portfolio will decline in value because of

increases in market interest rates. The value of an investment and the return on invested capital will fluctuate over time and, when

sold or redeemed, may be worth less than its original cost. This material is not intended as and should not be used to provide

investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors

should consult with an investment advisor to determine the appropriate investment vehicle. Investment decisions should be made

based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. All opinions and views

constitute our judgments as of the date of writing and are subject to change at any time without notice.

Sector ETFs, such as Real Estate Investment Trusts (“REITs”) are subject to industry concentration risk, which is the chance that

stocks comprising the sector ETF will decline due to adverse developments in the respective industry.

The use of leverage (borrowed capital) by an ETF increases the risk to the fund. The more a fund invests in leveraged instruments,

the more the leverage will magnify gains or losses on those investments.

Country/Regional risk is the chance that world events such as political upheaval or natural disaster will adversely affect the value of

securities issued by companies in foreign countries or regions. Country/Regional risk is especially high in emerging markets.

Emerging markets risk is that chance that stocks of companies located in emerging markets will be substantially more volatile, and

substantially less liquid, than the stocks of companies located in more developed foreign markets.

Securities rated below investment grade, commonly referred to as “junk bonds,” may involve greater risks than securities in higher

rating categories. Junk bonds are regarded as speculative in nature, involve greater risk of default by the issuing entity, and may be

subject to greater market fluctuations than higher rated fixed income securities.

Diversification does not protect against loss in declining markets.

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AFAM Capital, Inc. is an Investment Adviser, registered with the Securities & Exchange Commission and notice filed in the State of

California and various other states. For more information, please visit afamcapital.com. Registration as an investment advisor does

not imply any certain level of skill or training. Innealta is an asset manager specializing in the active management of portfolios of

ETFs.

Contact your financial advisor for additional information.

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