During July, Zenith’s equity research team met with a significant contingent of the 2023 International Shares peer group. Over three extensive overseas trips, our analysts met with 88 unique investment managers, that collectively manage 164 products on our approved product list. Although managers held many contrasting views, six key themes emerged from our travels.

Trip 1: Hong Kong & Singapore

Quan Nguyen (Head of Equities) & Atharv Seth (Investment Analyst)

Investors remain cautious about emerging markets.

When we dive into the realm of emerging markets, China continues to dominate the conversation. Currently, global investors are focused on the uncertainty surrounding the Chinese economy and the geopolitical risk of regional conflict.

Our meetings echoed this sentiment, with only a moderate flow of funds into emerging market strategies, particularly from developed market investors. Many managers believe this negative sentiment might be turning, noting a recent surge in client enquiries. However, asset allocators remain on the sidelines awaiting a reduction in geopolitical risk. Managers pointed towards the Taiwanese election in January 2024 as a potential catalyst that could spark renewed investment into the region. A relatively new party, Taiwan’s People Party (TPP), has increasingly gained popularity amongst voters. Many managers view a TPP victory to be a favourable outcome, as the TPP would be more open to discussions with China whilst maintaining the status quo on Taiwan’s independence.

Additionally, the Chinese labour market is at a critical juncture, with youth (ages 15-25) unemployment at a record high (over 20%). With China boasting a significant number of science, technology, engineering, and mathematics graduates in comparison to other countries, it is evident the younger generation has a greater desire for ‘white collar’ jobs, which contrasts with the historical dynamic of China being the manufacturing hub of the world. All eyes are on the Chinese policymakers, with managers expecting government stimulus to come into play.

Managers wrong-footed in China.

Chinese equities posed a significant challenge for both emerging market and Asia-focused managers. Over the past year, the key driver of returns in Chinese equities has been state-owned enterprises (SOEs).

New government regulations have mandated the use of return on equity metrics to evaluate the performance of management teams. As a response, SOEs have increased their dividend payments, catching the attention of retail investors, which drove up share prices. This didn’t bode well for much of the manager peer group, who were largely positioned in privately owned enterprises, expecting them to thrive as China emerged from its stringent COVID lockdowns.


Trip 2: United States

Stephen Colwell (Senior Investment Analyst) & Jock Allen (Senior Investment Analyst)

ESG backlash from southern US states

Despite tornado warnings, Canadian wildfires and a U.S. heatwave playing out on our arrival to Boston, the US’s polarisation on the appropriateness of environmental, social and governance (ESG) considerations remained a key focus for many of our US-based managers.

There has been a significant buzz around legislative efforts in several southern US states that limit the ability of state-based pension funds when it comes to allocating funds to investment strategies that consider ESG factors. One of the most vocal of these states was Florida, where presidential candidate Ron DeSantis, passed legislation that prohibits state officials from investing in strategies that promote ESG objectives.

The issue was discussed at length with our US managers, with many having substantial exposure to state pension funds that have been affected by the states with recently passed or soon-to-pass legislation. A small subset of managers had been subpoenaed and were required to provide greater detail on their approach to ESG integration. However, the key takeaway was the general indifference of managers to this development, with many seeing it simply as an act of political manoeuvring that will only impact managers whose strategies place ESG objectives ahead of financial returns.

The continued emergence of global small caps

Global small companies are increasingly being recognised by investors as a distinct asset class that warrants a meaningful allocation. In recent years, we’ve seen dramatic growth in the number of global small company strategies available on our APL. This surge has been fuelled by collaborations between domestic distributors and global asset managers to bring quality products with significant capacity to the Australian market.

The small-cap peer group has grown from 7 products in 2018 to 20 as of 2022. With investment flows picking up, we expect further growth in this segment. We met with several managers that are looking to bring their longstanding capabilities to the growing Australian market.


Trip 3: United Kingdom

Tom Goodrich (Senior Investment Analyst) & Sean Currie (Investment Analyst)

No recession for the rich

It seems the pressure felt by recent interest rate hikes has yet to reach the high-end consumer, with luxury goods companies remaining a popular investment option for asset managers. Walking around Mayfair as it bustled with activity, we saw this firsthand, with storefronts selling luxury brands such as Gucci, Louis Vuitton, Hermes and Moncler swarming with well-dressed clientele (Zenith analysts excluded).

Sustainable strategies continue to grow

Given Europe is arguably more progressed in ESG/responsible investing than other regions, it was no surprise that responsible investment strategies continue to be more prevalent in Europe than in the rest of the world. In the UK, we visited twice as many managers with strategies classified as ‘Thematic’ and ‘Impact’ than the Asian and US regions combined.

Managers continue to adjust to Europe’s Sustainable Finance Disclosures Regulation (SFDR) reporting rules, which now require them to disclose how ESG factors are integrated at both an entity and product level. With the UK equivalent to SFDR having been proposed, many managers are continuing to develop their operational approaches and reporting mechanisms in preparation for the new requirements. Earlier this year, various funds totalling nearly $A300 billion were reclassified from the SFDR's highest sustainability classification, Article 9, to the less demanding Article 8.

Many managers on our APL, particularly those that classify themselves as Article 9, view these recent reclassifications positively, noting the Article 9 designation now carries more weight in the market and highlights their responsible investment processes and reporting practices as best-in-class.