Zenith sector review: international shares – emerging markets and Asian equities

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Do investors gain emerging market exposures indirectly through Australian equities? What is the optimal emerging market exposure for an international equities portfolio? These are the questions Zenith seeks to answer in our 2019 Emerging Market & Asian Equities Sector Report.

Given the strong historical relationship between Australian and emerging market equities, investors have traditionally found limited diversification benefits allocating between the two asset classes. However, Zenith has found that the correlation has been declining, at the same time as the relationship between emerging market equities and Chinese equities has strengthened.

Zenith’s analysis concludes that the decoupling of Australian and emerging market equities is predominantly driven by China’s transformation, which has become the dominant force in emerging markets. There has been a dramatic shift in the wealth of Chinese households, fuelling China’s transition from a resource-consuming economy to a consumer-led one. This rapid change in population dynamics and wealth has given rise to a different type of Chinese consumption, where income is increasingly spent on education, travel, healthcare and aged care.

Given the performance-enhancing characteristics of emerging market equities and their diversification benefits, Zenith conducted an analysis to determine their optimal portfolio allocation. Our analysis found that an emerging market equities exposure of approximately 20% to 35% of an overall international equities allocation is ideal, depending on active and passive management considerations.

For 12 months leading up to 30 September 2019, Zenith’s rated Emerging Market funds performed well, with the average fund delivering 9.0% (after fees) compared to 5.1% for the MSCI Emerging Markets Index, generating an outperformance of 3.9%. Taking a different perspective, 85% of Zenith’s rated active Emerging Market funds outperformed the MSCI Emerging Markets Index.

Meanwhile, Zenith’s rated Asia ex-Japan funds delivered an average return of 6.1% (after fees) over the 12 months leading up to to 30 September 2019, compared to 3.6% for the MSCI All Country Asia ex-Japan Index, outperforming the index by 2.5%.

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