TIDMBEMO
Barings Emerging EMEA Opportunities PLC
LEI: 213800HLE2UOSVAP2Y69
Annual Report & Audited Financial Statements for the year ended 30 September
2023
The Directors present the Annual Financial Report of Barings Emerging EMEA
Opportunities PLC (the "Company") for the year ended 30 September 2023. The full
Annual Report and Accounts for the year ended 30 September 2023 can be accessed
via the Company's website, www.bemoplc.com.
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 30 September 2023 but is derived from
those accounts. Statutory accounts for the year ended 30 September 2023 will be
delivered to the Registrar of Companies in due course. The Auditors have
reported on those accounts; their report was (i) unqualified, (ii) did not
include a reference to any matters to which the Auditors drew attention by way
of emphasis without qualifying their report and (iii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act 2006. The text of
the Auditors' report can be found in the Company's full Annual Report and
Accounts on the Company's website at www.bemoplc.com.
Financial Highlights
for the year ended 30 September 2023
Annualised NAV Share price total return1,# Dividend per Ordinary Share1,#
total return1,#
0.5% (2022: -8.8% (2022: -29.1%) 17p (2022: 17p)
-29.9%)
For the year ended 30 September 2023 2022 % change
NAV per Ordinary Share1 617.6p 632.1p -2.3%
Share price 483.0p 548.0p -11.9%
Share price total return1,# -8.8% -29.1% -
Benchmark (annualised )1 -3.4% -20.1% -
Discount to NAV per Ordinary Share1 21.8% 13.3% -
Dividend yield1,2 3.5% 3.1% -
Ongoing charges1 1.6% 1.6% -
Year ended 30 September 2023 Year ended 30 September 2022
Revenue Capital Total Revenue Capital Total
Return per 14.59p (13.16)p 1.43p 16.77p (289.37)p (272.60)p
Ordinary
Share0
Revenue return (earnings) per Ordinary Share is based on the revenue return for
the year of £1,726,000 (2022: £2,014,000). Capital return per Ordinary Share is
based on net capital loss for the financial year of £1,557,000 (2022: loss
£34,746,000). These calculations are based on the weighted average of 11,829,676
(2022: 12,007,165) Ordinary Shares in issue, excluding treasury shares, during
the year.
At 30 September 2023, there were 11,796,902 (2022: 11,930,201) Ordinary Shares
of 10 pence each in issue which excludes 3,318,207 (2022: 3,318,207) Ordinary
Shares held in treasury. The shares held in treasury are not included when
calculating the weighted average of Ordinary Shares in issue during the year.
All shares repurchased during the year have been or are being cancelled.
1 Alternative Performance Measures ("APMs") definitions can be found in the full
Annual Report
2 % based on dividend declared for the full financial year and share price at
the end of each financial year.
# Key Performance Indicator.
* The benchmark is the MSCI EM EMEA Net Index. Prior to 16 November 2020, it was
the MSCI EM Europe 10/40 Net Index.
Five Year Financial Record
At 30 September 2023 2022 2021 2020 2019
Shareholders' funds £73m £75m £111m £85m £116m
NAV per Ordinary Share 617.6p 632.1p 920.7p 694.7p 930.8p
Share price 483.0p 548.0p 793.0p 587.0p 846.0p
ROLLING ANNUALISED PERFORMANCE (%)
3 years 5 years
NAV Total Return -1.3 -2.5
Share Price Total Return -3.3 -4.0
Benchmark Total Return 1.0 -1.6
Source: Barings, Factset.
CALAR YEAR PERFORMANCE (%)
+------------------------+----+-----+----+-----+----+
| |2019|2020 |2021|2022 |2023|
+------------------------+----+-----+----+-----+----+
|NAV Total Return |17.8|-22.3|36.6|-29.9|0.5 |
+------------------------+----+-----+----+-----+----+
|Share Price Total Return|24.3|-27.5|39.7|-29.1|-8.8|
+------------------------+----+-----+----+-----+----+
|Benchmark Total Return |15.9|-22.6|33.3|-20.1|-3.4|
+------------------------+----+-----+----+-----+----+
Source: Barings, Factset.
Chairman's Statement
Despite a challenging market backdrop for both EMEA equities and markets
globally, it is pleasing to report that our Investment Manager delivered a small
NAV total return of 0.5% and outperformed the benchmark.
Last year I wrote of the tragic events in Ukraine and the various knock-on
impacts this had to the global economy and financial markets, all of which
unfortunately resulted in a significant decline of the Company's NAV. This year,
the performance of equity markets across EMEA has, to a much larger extent,
reflected the differing fortunes of each
country in which your Company invests. In this context, the performance of our
region's underlying markets was very diverse. Markets in Europe gained between
45-60% on tentative hopes that their economic outlook was improving, whilst more
orthodox monetary policy in Turkey helped their equity market gain close to 60%.
Meanwhile, in contrast, the larger markets in the Middle East and South Africa
posted small declines as some profit taking and a weakening macroeconomic
picture both weighed on performance. Overlaying this, our markets also had to
contend with the broader global headwinds of inflation, adverse currency
movements and higher interest rates across much of the developed world, both of
which frequently impacted sentiment as investors digested the latest economic
data and reassessed the path for interest rates.
Despite this challenging backdrop, it is pleasing to report that our Investment
Manager delivered a small NAV total return of 0.5%. This outperformed the
benchmark, which declined -3.4%. This result was largely attributable to stock
selection, based on our Investment Manager's fundamental bottom-up investment
process.
The strong relative returns during this financial year are a testament to how
performance has continued to recover after last year's write-down of Russian
assets, with the portfolio +3.9% ahead of the benchmark. Whilst the Company
remains ahead of the benchmark over the ten year period performance, performance
over the three to five years continues to be impacted by this write-down, with
the Company lagging behind the benchmark across both periods.
Investment Portfolio
The portfolio's holdings in Emerging Europe were some of the strongest
performers, helped by some modest improvements in the region's economic outlook,
a strong tourism season in Greece and, in the case of Poland and Hungary, an
easing of monetary policy.
Similarly, Turkish equities held in the portfolio returned in excess of 80% in
the financial year. Local equity markets in Turkey have been supported by
domestic savers seeking a return in the inflationary environment, whilst the
central bank's move recently to more orthodox monetary policy has been welcomed
by the market.
In the Middle East, the portfolio's holdings in Saudi Arabia and Qatar
registered the largest declines on an absolute basis, with a lower average oil
price impacting short-term economic sentiment in both countries. Whilst the
value of the Company's holdings in these markets declined over the period, stock
selection across these markets was strong and helped improve the Company's
relative performance versus the benchmark.
Holdings in South Africa declined in absolute terms as the country continues to
face a challenging economic backdrop, worsened by disruptions to the electricity
supply.
Russian Assets
Russian assets in the portfolio continue to be valued at zero, whilst extensive
sanctions and restrictions on the sale of securities remain in place. Dividends
from Russian securities are being received into a Russian company bank account
but cannot currently be repatriated. The Board will continue to value these
assets at zero until they are capable of being realised. Consequently, there is
no exposure to Russia in the Company's NAV and Management Fees are not being
charged on these assets.
The Board is actively reviewing possible structures that would enable the
Company to separate these Russian assets from the main portfolio, whilst
ensuring compliance with global sanctions. The Board is mindful of the value
these holdings may provide to shareholders in the future and any possible
structure will be designed to protect that value. Most of the strategic options
available to the Company are dependent on finding a resolution to this problem,
and we attach high priority to this. Such a resolution is dependent upon meeting
all relevant regulatory requirements and the timescale for any required
approvals is not in our control.
Discount Management
The Board continues to focus on discount management, with the aim of containing
discount volatility. Whilst share buybacks continue to be an option available to
the Company to help manage the discount, they are significantly less effective
during periods of elevated market volatility, as has been the case recently. The
Company bought back slightly more shares during this financial year, spending a
similar amount to last year, but with the majority of shares acquired during the
first half of the year.
During the year, 133,299 Ordinary Shares were bought back and cancelled at an
average price of £5.20 per Ordinary Share, for a total cost of £694,000. The
share buybacks added approximately 1.29 pence per Ordinary Share to NAV.
The discount at year-end was 21.8% and the average discount during the period
was 18.9%. This compares with a discount of 13.3% as at 30 September 2022 and an
average discount during the 2021/22 financial year of 15.3%. The average
discount has been noticeably wider since the write-down of Russian assets in the
first quarter of 2022. In addition, increased levels of broader market
volatility across our investment universe and equity markets globally have also
heightened discount volatility. This has impacted many investment trusts and is
not unique to our Company.
Discount Control Mechanism
In October 2020, the Company announced a broadening of its investment mandate
and introduced new discount management and performance targets over a five-year
time horizon, to end September 2025. When these targets were set, we could not
have imagined how events would have unfolded in Russia and the associated knock
-on effects on energy prices, inflation and the global economy. Given the
changed circumstances, the Board believes there is a strong likelihood that we
will miss the targets, triggering the need to make a tender offer for up to 25%
of the Company's issued Ordinary Shares in late 2025. In the short term it seems
unlikely that we will be able to realise the Russian assets, so, based on
current circumstances and depending on the take up, the tender offer may cause
the Company to shrink substantially potentially undermining liquidity and
increasing cost ratios beyond an acceptable level. Meanwhile, until the Russian
securities position is resolved, the value obtainable by shareholders from other
corporate solutions is also likely to be sub-optimal. Hence, whilst we cannot
predict the position in two years' time, the Board will keep the appropriateness
of the discount control mechanism under review and, if the 2025 targets are not
met, evaluate the possibility of a tender offer alongside other strategic
options.
Gearing
There were no borrowings during the period. At 30 September 2023, there was net
cash of £3.9 million (30 September 2022: £0.2 million). The Company does not
currently use a loan facility but keeps its gearing policy under review. The
Company may look to make use of borrowing arrangements when markets are less
volatile with the objective of increasing portfolio returns.
Dividends
The income generated by the portfolio continues to be impacted by the absence of
Russian dividends.
In the financial year under review, the income account generated a return of
14.6 pence per Ordinary Share, compared with 16.7 pence last year. The Directors
are proposing a maintained final dividend of 11 pence per share (2022: 11 pence
per share). In respect of the six-month period ended 31 March 2023, the Company
paid an interim dividend of 6 pence per share (2022: 6 pence per share).
Based on dividends for the financial year and the share price as of the end of
the financial year, the Company's shares yielded 3.5%. The Board believes that,
given the circumstances, this remains an attractive yield. The Company retains
the flexibility to pay out up to 1% per annum of NAV from capital as income to
shareholders. The Investment Manager continues to believe the income potential
of the portfolio will grow over the medium term and that this growth will be
sustainable.
Board Succession
The Board will be recommending my reappointment as a Director of the Company at
the 2024 Annual General Meeting. I was appointed as a Director of the Company in
April 2014 and appointed as Chairman in January 2018. Thus, if re-elected at the
forthcoming 2024 AGM I will have served as a Director beyond the nine-year
recommended period of tenure.
The Board considers that owing to the strategic issues now facing the Company,
it would be in the best interests of the Company and shareholders that I remain
as a Director and Chairman of the Company beyond the nine-year recommended
period of tenure. This would be to ensure continuity in the ongoing discussions
the Board is undertaking regarding the future of the Company.
Calum Thomson will be seeking re-election at the 2024 AGM; however, he has
notified the Company that he will be standing down and resigning as a Director
after the 2024 AGM once a suitably qualified successor has been identified.
Calum has been an extremely valuable member of the Board and a highly effective
Audit Committee Chair. He will be greatly missed and we extend our thanks to
him.
A more detailed discussion of succession planning can be found in the full
Annual Report.
Annual General Meeting
The Board would be delighted to meet shareholders at the Company's Annual
General Meeting ("AGM"), to be held at the offices of the Investment Manager, 20
Old Bailey, London EC4M 7BF, on Thursday, 25 January 2024 at 10am. The
Investment Manager will give their customary presentation on the markets and the
outlook for the year ahead. Details can be found in the Notice of the AGM.
Outlook
Investors continue to show limited confidence in the outlook for the global
economy, as higher interest rates begin to take effect and dampen economic
output. Meanwhile, consumer confidence, although somewhat improved, remains at
low levels and China's reopening has shown signs of faltering.
Across our investment region, Emerging European markets are generally faring
well despite the overhanging risk of an economic slowdown across Europe more
broadly. Larger economies such as Poland are benefitting from strong domestic
demand, whilst the Greek economy continues to recover from its sovereign debt
crisis and has recently regained its investment grade status.
Middle Eastern economies are predicted to grow at a slower pace than was the
case in 2022, but remain well placed to benefit from low inflation and
substantial investment as they seek to further diversify.
The macroeconomic picture in South Africa remains challenging, with problems
worsened by the exacerbation of power shortages. However, with inflation
generally trending down there is the potential for a consumer-led recovery. This
may present selective opportunities for investment in domestically focused
businesses.
Whilst economic fortunes differ between countries, the region has seen a
recovery in corporate earnings in aggregate, whilst at the same time stock
market valuations continue to look attractive relative to history.
Promotional Activity and Keeping Shareholders Informed
The Board and Investment Manager have in place an ongoing communications
programme that seeks to maintain the Company's profile and its investment remit,
particularly amongst retail investors. Over the review period, we have continued
to distribute our monthly BEMO News which is emailed to engaged supporters,
including many hundreds of the Company's shareholders. These emails provide
relevant news and views plus performance updates and links to topical content.
If you have not already done so, I encourage you to sign up for these targeted
communications by visiting the Company's web page at www.bemoplc.com and
clicking on `Register for email updates'.
Frances Daley
Chairman
7 December 2023
Report of the Investment Manager
Our strategy seeks to diversify your portfolio by harnessing the long-term
growth and income potential of Emerging EMEA. The portfolio is managed by our
team of experienced investment professionals, with a repeatable process that
also integrates Environmental, Social and Governance ("ESG") criteria.
Our strategy
Access First-hand Process ESG Integration
Expertise
Experienced The Extensive Fully integrated dynamic ESG
investment investment primary assessment combined with active
team helps to team conducts research and engagement to positively
foster strong hundreds of proprietary influence ESG practices.
relationships company fundamental
with the meetings per analysis,
companies in year, evaluating
which we building long companies over
invest. -term a 5-year
relationships research
and insight. horizon with
macro
considerations
incorporated
through our
Cost of Equity
approach.
A detailed description of the investment process, particularly the ESG approach
can be found in the full Annual Report.
Market Summary
Emerging European, Middle East and African (EMEA) equity markets were weaker
over the period, with the MSCI EM EMEA index declining -3.4% in GBP terms. The
portfolio outperformed the benchmark over the financial year, with the Company's
NAV total return posting a modest gain of +0.5% in GBP terms.
Whilst the performance of EMEA equity markets over the period was owed in part
to the limited confidence investors have shown in the outlook for the global
economy, returns were also compounded by the appreciation of Sterling, which
strengthened significantly versus most EMEA currencies and dragged down returns
when expressed in GBP terms.
EMEA, in line with markets globally over the financial year, often suffered
changing fortunes, owing to the rapidly evolving monetary and inflationary
environment. The region's equity markets posted modest gains at the start of the
financial year helped by economic conditions that generally proved to be less
bad than feared and company earnings which were more resilient than anticipated.
There was also hope that inflation across developed countries might be cooling
and, in response, major central banks would slow the pace of interest rate
hikes.
EMEA Market Performance (in GBP, based on MSCI indices)
Currency Returns (vs GBP returns, %) - 1 October 2022 to 30 September 2023
+---------------------------+------+
|Hungarian Forint |7.2% |
+---------------------------+------+
|Turkish Lira |-38.2%|
+---------------------------+------+
|Euro |-1.3% |
+---------------------------+------+
|Polish Zloty |3.7% |
+---------------------------+------+
|Egyptian Pound |-42.1%|
+---------------------------+------+
|Czech Koruna |-0.5% |
+---------------------------+------+
|South African Rand |-12.5%|
+---------------------------+------+
|United Arab Emirates Durham|- 8.4%|
+---------------------------+------+
|Kuwaiti Dinar |-8.2% |
+---------------------------+------+
|Saudi Riyal |-8.3% |
+---------------------------+------+
|Qatari Rial |-8.4% |
+---------------------------+------+
Country Returns (vs GBP returns, %) - 1 October 2022 to 30 September 2023
+------------+------+
|Hungary |60.8% |
+------------+------+
|Turkey |60% |
+------------+------+
|Greece |56.1% |
+------------+------+
|Poland |45.5% |
+------------+------+
|Egypt |35.8% |
+------------+------+
|Czechia |24.1% |
+------------+------+
|South Africa|-2.4% |
+------------+------+
|U.A.E |-6.5% |
+------------+------+
|Kuwait |-10.3%|
+------------+------+
|Saudi Arabia|-13.9%|
+------------+------+
|Qatar |-24.9%|
+------------+------+
Source: Barings, Factset, MSCI, September 2023
Markets in the region were weaker at the turn of the calendar year and into the
first quarter of 2023, as inflation was not falling as quickly as hoped and
investors adjusted expectations for a prolonged period of higher interest rates.
Stresses in the banking sector at this time also weakened sentiment, although
there was no direct impact on companies within our investment region.
Positively, returns were strongest towards the latter stages of the period,
helped by unique market-specific developments, such as increasingly market
-friendly monetary policy in Turkey, a booming real estate sector in the United
Arab Emirates (UAE) and some modest improvements in Europe's economic outlook.
There were also some modest improvements to the global economic growth outlook,
with consumer confidence and economic activity surveys picking up from low
levels.
Regionally, markets in Central and Eastern Europe were some of the best
performers across EMEA with Greece, Hungary and Poland returning between 45-60%.
The region rebounded dramatically after underperforming for most of 2022,
benefitting from some modest improvements in Europe's economic outlook and in
the case of Greece, a successful tourism season and confirmation that business
-friendly PM Mitsotakis had won a second term. Performance was also amplified by
local currency strength, with the Hungarian Forint and Polish Zloty being the
only two currencies to appreciate versus Sterling over the period.
Turkey was another strong performer, returning 60% in GBP terms. Earlier in the
period Turkish equities accelerated in response to local savers seeking a haven
for their assets in the rapidly rising inflationary environment. More recently,
sentiment improved following the adoption of orthodox monetary policy by the
central bank, with policymakers hiking rates from 8.5% to 40% in an effort to
tame hyperinflation. This in turn has laid the foundation for international
investors to return to the market, with bond issuance and initial public
offerings rising substantially from lows.
Saudi Arabia and Qatar were the region's worst performers, declining 14% and 25%
respectively. This reflected a combination of some profit taking, following
strong performances in 2022, and dollar weakness, which weighed on the region's
pegged currencies. Oil prices were weaker for most of the period, before
accelerating to close to $100 a barrel in September as OPEC+ begun to constrain
supply in response to subdued global demand.
Income
The Company's key objective is to deliver capital growth from a carefully
selected portfolio of emerging EMEA companies. However, we are also focused on
generating an attractive level of income for investors from the companies in the
portfolio.
Owing to a full year without any contribution from Russian dividends, the
portfolio generated lower revenue during this financial year than was the case
for 2021/22. However, looking forward, we believe that rising pay-out ratios,
efficiency gains, and an encouraging economic environment, most notably in the
Middle East and Eastern Europe, will all contribute positively to revenue growth
for the portfolio over the medium term. Importantly, we believe that this
revenue growth will be sustainable.
Macro Themes
In line with our bottom-up approach, our primary focus is to identify attractive
investment opportunities at the company level for our shareholders.
Nevertheless, we remain vigilant and mindful of broader macro effects within the
region. This in turn helps to support the contribution to performance from our
company selection, accessing long-term growth opportunities, while reducing the
effects of declines in performance from major macro dislocations.
Greece & Turkey - Leading Emerging Europe's revival
Despite an uncertain global macro backdrop, a number of Eastern European stock
exchanges have become some of the best performing in 2023. More than a decade
after Greece teetered on the edge of a Eurozone exit, the country has defied
critics and rebounded, delivering GDP expansions of 8.4% in 2021 and 5.9% in
2022. While Greece owes in part its economic recovery to its position as a
traditional tourist destination, which accounts for about one-fifth of GDP, the
country has also benefitted from significant investment, a critical economic
building block. This growth in investment has stemmed from its place as a
growing services exporter, expanding more than 85% between 2010-2022.
Importantly, the merits of this impressive and hard-fought economic recovery
have begun to bear fruit on the international stage, with the country having
recently regained its investment grade status more than 12 years after losing it
during the Euro area's sovereign debt crisis. This would structurally lower the
cost of borrowing for the government and allow for a stable funding base for the
country's future needs.
Elsewhere, Turkey's recent elections saw President Erdogan defeat opposition
leader Kemal Kiliçdaroglu to extend his rule to a third decade. While
international investor confidence in Turkey is vulnerable to a variety of
factors, recent indications that the Erdogan administration may be taking a more
orthodox stance have been welcomed, with the hiring of Mehmet Simsek, a former
deputy prime minister well regarded by investors as the finance and treasury
chief. Thus far we have seen Erdogan pivot away from prior policies which have
damaged the economic standing of the country amid runaway inflation, with what
now appears to be a President and central bank more united in a drive to control
price pressures. Since Simsek's appointment, the central bank have raised
interest rates from 8.5% to 40%, and by doing so have laid the foundations for
trust, in a nascent sign that clearer and more consistent economic policies may
yet continue.
Keeping the Lights On - South Africa
While recent months have seen headlines focus on rising temperatures across
Europe, in what has been the hottest summer on earth since records began, South
Africa was heading into its winter season with the prospect of the country's
worst ever power cuts. While power shortages are not uncommon in South Africa, a
number of operational problems at state energy supplier Eskom caused higher-than
-usual rates of `unplanned outages'. In response, power consumption was managed
by significant "Load Shedding", which refers to strategic blackouts where
citizens are left without power for between six to twelve hours a day in order
to ease pressure on the grid, allowing electricity to be provided for key
services.
The impact of this practice has been significant, acting as an economic drag,
particularly for industries where re- scheduling operations is unfeasible - such
as retailers and telecommunications services - as lower footfall in shops and
loss of service on phone networks has impacted profit margins. While these
problems have showed signs of easing recently, the considerable disruption
caused has reignited debate regarding the future of South Africa's energy
infrastructure. With power outages persisting in the region as far back as 2007,
South Africa is increasingly turning to the private sector to resolve its
chronic shortages by making it easier for companies to build plants and paying
households and businesses to produce electricity from renewable sources. This is
crucial given that Africa boasts the fastest growing population in the world,
and where cost-efficient sustainable energy sources will be vital to the
continent's socioeconomic development. The growth in private generating capacity
and energy storage solutions has the potential to transform the African
continent by enabling it to capitalise on its rich renewable energy resources,
notably its wealth of wind, sunshine, and water.
Portfolio Country Weight (%)
Saudi Arabia 29%
South Africa 24%
U.A.E. 13%
Poland 8%
Turkey 6%
Qatar 6%
Hungary 5%
Greece 4%
Kuwait 4%
Czechia 1%
Romania 0%
Source: Barings. September 2023.
Portfolio Sector Weight (%)
Financials 48.5%
Materials 12.6%
Consumer Disc. 10.1%
Comm. Services 8.3%
Industrials 6.4%
Real Estate 5.6%
Consumer Staples 4.6%
Energy 2.7%
Information Technology 0.6%
Health Care 0.3%
Utilities 0.3%
Source: Barings. September 2023.
Rise of the Middle Powers - Middle East
Whilst not a new concept, the idea of "middle powers" countries which whilst not
great powers, are characterised as having heft, in economic, geographic, or
demographic terms is gaining prominence in an increasingly polarised world.
Here, two Middle Eastern powerhouses: Saudi Arabia, the world's top oil
exporter, and the United Arab Emirates (UAE), the region's dominant trade hub,
have seen their economies buoyed by rising energy prices, and are determined to
chart their own courses in an era of shifting global dynamics as non-aligned
middle powers. Examples of this have included Saudi Arabia acting as a mediator
between Russia and Ukraine, while the UAE hosts this year's global climate
summit, COP28. This shift on the international stage has significance, with the
Middle East able to wield its influence as a strategic trading partner, due to
its vast global oil and gas reserves and position between Europe, Asia and
Africa.
Exemplifying this shift, until recently the BRICS nations (Brazil, Russia,
India, China and South Africa) had members from every corner of the developing
world except the Middle East. As of August, however, this has changed, with the
announcement that from the start of 2024 admission will extend to a further six
countries, including Saudi Arabia and the United Arab Emirates. This change
highlights how these emerging economies are seeking a bigger role by using the
bloc as a countervailing force to Western groupings, such as the G7.
Recent Escalation between Israel and Hamas
Whilst occurring after the end of the Company's financial year, we are
monitoring risks arising from the conflict between Israel and Hamas. Although
there has been no direct impact on the investments within your portfolio, we
have witnessed selling pressure across markets globally and the EMEA region, as
sentiment has been damaged and geopolitical risk heightened. While Israel is not
a major oil producer, any prospect of escalation will likely raise risk premia
in markets, which has the potential to keep the oil price elevated. This is
especially true if Iran becomes directly involved in the conflict. Whilst the
situation is unfolding, we have reduced exposure across some positions in the
Middle East.
Company Selection
Our team regularly engages with management teams and analyses industry
competitors to gain an insight into a company's business model and sustainable
competitive advantages. Based on this analysis, we seek to take advantage of
these perceived inefficiencies through our in-depth fundamental research, which
includes an integrated Environmental, Social and Governance (ESG) assessment,
and active engagement, to identify and unlock mispriced growth opportunities for
our shareholders.
The portfolio's outperformance relative to the benchmark was driven almost
entirely by stock selection, with holdings in the Financials, Industrials and
Real Estate sectors contributing most significantly to relative returns.
Financials continue to represent the largest sector exposure in the portfolio.
This is not a top-down allocation but instead reflects the compelling bottom-up
stock picking opportunities we continue to find in the space. Across Emerging
Europe, we hold a number of attractive investments in companies with strong
underlying growth potential operating in an environment that is sheltered from
intense competition. Similarly, we own a number of banks in the Middle East that
continue to see attractive loan growth and in some cases benefit from various
government subsidies.
Eastern European financials were some of the portfolio's best performers. In
Poland, insurance company PZU outperformed following strong earnings underpinned
by much-improved insurance policy pricing dynamics a function of the substantial
real income growth over the last decade, Polish car owners increasingly opt for
higher margin Motor-Own-Damage policies, which is increasing PZU's written
premium growth and profitability. Greek bank NBG was another strong performer,
helped by improving domestic macroeconomic backdrop, the higher interest rate
environment and healthy corporate loan growth. Hungarian bank OTP also
outperformed, helped in part by the company's successful expansion of its
business into a number of frontier markets, providing opportunities for future
growth.
In contrast, holdings in Middle Eastern banks underperformed over the year.
Saudi Arabian bank SNB and Qatar-based QNB were two of the weakest performers,
partly reflecting the more muted economic growth outlook across the region, and
lower average oil price. Shares in SNB also suffered weakness in response to its
investment in Credit Suisse, which was viewed negatively by investors. Holdings
in both SNB and QNB were reduced over the year.
Stock selection in the Industrials sector also contributed positively to
relative performance, driven by the holding in Turkish conglomerate Koç Holding.
The company's earnings have been strong, driven by its automotive subsidiary
Ford Otosan that produces 75% of all commercial vehicles sold in Europe, and is
benefitting from a material uptick in
export volumes.
In the Real Estate sector, leading United Arab Emirates developer Aldar
outperformed, as a booming domestic property market has created order backlogs
and increased prices. This is underpinning strong company earnings, with robust
operating trends across multiple business units.
Stock selection across a number of sectors in South Africa was weak over the
period. South African mining group Anglo American Platinum underperformed,
reflecting a weaker production outlook and near-term earnings weakness in light
of energy rationing. Despite the recent weakness, we continue to hold the
company, and in our view, the long-term investment case remains compelling,
underpinned by the company's exposure to metals required for the energy
transition. Discount fashion retailer Mr Price also underperformed, as problems
with South Africa's electricity supply have disrupted trading conditions. In
contrast, the holding in technology investment group Prosus contributed
positively to relative returns, helped by a recovery in performance from Chinese
internet company Tencent, in which Prosus owns a significant stake.
Outlook
In the short term, global equity markets are likely to remain volatile as
investors weigh up a potential peak in monetary tightening later this year by
the Federal Reserve against a back-drop of deteriorating corporate earnings.
The outlook for emerging markets, however, is more constructive as the policy
cycle has also already peaked in many countries and in some is already easing
again. China's re-opening and policy stimulus should help lift economic activity
globally, which should support a recovery in corporate earnings in 2024 and
beyond.
Markets in the Middle East are likely to be volatile over the coming months as
sentiment has been negatively impacted by the recent Israel-Hamas conflict. This
has renewed concerns of supply disruption in the energy market, which, along
with supply cuts, have kept the oil price higher than it might otherwise have
been. Looking further ahead, we continue to believe there is a great potential
for long term structural growth as the region further diversifies its economies.
The South African economy remains challenged as issues with the country's
electricity supply have significantly impacted how businesses have been able to
function. This remains a major issue for the country, and therefore we continue
to be highly selective with our exposure. We do, however, believe there are some
green shoots of recovery emerging with the potential for domestic consumption to
pick up as inflation falls.
A subdued European growth outlook makes us wary of the economic slowdown that
may be experienced by the small, open economies of central Europe. However, this
will allow for the cooling of tight labour markets, paving the way for lower
inflation readings. Importantly, larger economies such as Poland are set to
benefit from the continued rise in services exports, making it an export
powerhouse within Europe, and in turn, raising the wealth of citizens, improving
disposable incomes and consumption patterns.
In Turkey, recent moves towards more orthodox monetary policy have rightly been
rewarded by the market but, with inflation still running above 50% and the Lira
at record lows, many hurdles remain. If policymakers continue on this path then
economic progress will likely follow, with job creation supported by a large and
young population and business leaders that have honed their skill set in a
rapidly expanding domestic economy.
We expect Greece to continue to successfully attract investment in its service
sector-based economy whilst the recent upgrade of its sovereign risk to
investment grade status should prompt a period of high activity on the Athens
exchange. This is likely to involve prominent IPOs and the placement of stakes
in the Greek banking sector, currently held by the Hellenic Financial Stability
Fund.
Whilst we expect markets to continue to be volatile over the coming months, we
believe there are reasons to be optimistic for EMEA equities and the
diversification benefits the asset class can provide to a portfolio. In this
context, we will continue our process of building new or adding to existing
positions in companies with strong and sustainable business franchises where our
proprietary bottom-up research has identified a significant degree of
undervaluation relative to their future growth potential.
A Focus on ESG
Our proprietary ESG assessment forms a core component of our fundamental bottom
-up research. It is guided by our in-depth knowledge and regular interactions
with company management teams.
As an integral step of our research, our ESG assessment is undertaken by our
equity investment professionals as a fully integrated component of our
investment process. This approach to ESG is anchored by three pillars:
· Integration - Integrating ESG is core to our fundamental research and allows
us to better assess the risks and opportunities for our investments that are not
apparent in traditional finance analysis. This influences both our quality
assessment of a company as well as its valuation and is therefore integral to
decision making.
· A dynamic, forward-looking approach - Our proprietary assessment is aimed at
capturing improving or deteriorating standards to highlight and reward more
sustainable business practices, rather than relying on static assessments from
third parties.
· Active engagement over exclusion - We aim to drive positive outcomes through
direct engagement with corporate management teams rather than relying on blanket
exclusions, potentially unlocking value for our investors.
Engagement Case Study: FirstRand (South African Bank)
We regularly engage with companies with the aim of improving corporate behaviour
or enhancing
disclosure levels.
Overview:
· We engaged with FirstRand, one of South Africa's leading
financial institutions, to better understand their diversity
objectives and particularly policies in relation to female board
representation.
Objective:
· Our aim was to change the firm's behaviour and enhance the
representation of women on their board of directors.
Outcome:
· Through our regular interactions with company management, we
have questioned whether the company has a fair and representative
number of women on the board, of which we set more than 30%, to be
considered a start towards fair and representative.
· This line of questioning was well received, with the CEO
noting that they are actively aiming to improve in this area and
expect improved metrics in the medium term.
· The company has since set a target of 40% female board
representation within 2-3 years. We believe this is a clear target
and note that the company has been impacted by several female
board resignations due to limits on tenure for independents.
· We continue to engage with the company and encourage
management to improve in this area.
To ensure consistency of research we utilise a standardised proprietary
assessment framework to capture ESG attributes of each
individual company under research coverage (see Chart A opposite).
Chart A - Fundamental Research: Example ESG Assessment
Key Topics Data / Issues
to Consider
Sustainability 1 Employee Employee
of the Satisfaction Relations:
Business Model Staff
(Franchise) Turnover;
Strikes;
Remuneration
of Staff;
Fair Wages;
Injuries;
Fatalities;
Unionised
Workforce;
Employee
Engagement,
Diversity &
Inclusion
2 Resource Intensity Water Usage;
GHG Emissions;
Energy;
Transition
Risks
3 Traceability/Security Traceability of
in Supply Chain Key Inputs;
Investments in
Protecting the
Business from
External
Threats, e.g.,
Cyber Security,
Physical Risks
from Climate
Change;
Backward
Integration
(Protection of
Key Inputs);
Transition
Risks in Supply
Chain
Corporate 4 Effectiveness Sound
Governance of Supervisory/ Management
Credibility Management Structures:
(Management) Board Separation of
Chair & CEO;
Size of
Board;
Independence
of Board;
Frequency
of Meetings;
Attendance
Record;
Voting
Structure;
Female
Participation
on Boards.
5 Credibility of Credible
Auditing Arrangements Auditor;
Independent
Audit
Committee;
Qualification
to Accounts
6 Transparency & Access To
Accountability of Management;
Management Financial
Reporting; Tax
Disclosure and
Compliance;
Appropriate
Incentive
Structure;
Remuneration of
Staff; Gender &
Diversity
Considerations;
Employee
Relations
Hidden Risks 7 Environmental GHG
on the Footprint Emissions;
Balance Sheet Carbon
(Balance Intensity;
Sheet) History of
Environmental
Fines/Sanction
s; Reduction
Programmes in
Place for
Water/
Waste/Resource
Intensity,
Air Quality;
Transition
Risks;
Physicals
Risks from
Climate
Change
8 Societal Impact of Health/Wellness
Products/Services Implications of
Consumption of
goods/
services;
Product Safety
Issues;
Community
Engagement
9 Business Ethics Anti
-competitive
practices;
Bribery/Corrupti
on; Whistle
-Blower Policy;
Litigation
Risk; Tax
Compliance;
Freedom of
Speech; Anti
-Slavery and
Human Rights;
Gender &
Diversity
Considerations
ESG and its impact on the company valuation
ESG influences the company specific risk premium that forms a portion of the
overall discount rate attributed to the company for the purposes of valuation
and identifying a potential mispricing. Each company under research coverage
will be assessed by the relevant investment professional using a dynamic
framework, where the nine ESG sub-categories will each be assigned one of the
following ratings:
UNFAVORABLE NOT IMPROVING IMPROVING EXEMPLARY
Each sub-category is equally weighted and the sum of the nine ratings will
translate into either a positive or negative adjustment ranging from -1% to +2%
to the company's Cost of Equity ("COE"), to the company's Cost of Equity
("COE"), which is used to discount our earnings forecasts. In addition, we have
recently introduced a Carbon Cost assessment for relevant companies that we
anticipate will be impacted by costs associated with reducing greenhouse gas
(GHG) emissions, which can add a further 2% to the company's COE.
Baring Asset Management Limited
Investment Manager
7 December 2023
Detailed Information
Barings Emerging EMEA Opportunities PLC's annual report and accounts for the
year ended 30 September 2023 is available at https://www.barings.com/en
-gb/investment-trust/the-trust/financial-statements and will be available today,
along with the notice of meeting for the Company's AGM on
https://www.barings.com/en-gb/investment-trust/the-trust/corporate-documents.
It has also been submitted in full unedited text to the Financial Conduct
Authority's National Storage Mechanism and is available for inspection at
data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A)
of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
For any enquiries please contact:
Quill PR+44 (0)20 7466 5050
Nick Croysdill, Andreea Caraveteanu
About Barings Emerging EMEA Opportunities PLC
"Finding quality companies from Emerging Europe, the Middle East and Africa."
Barings Emerging EMEA Opportunities PLC (the "Company") is a UK based investment
trust that was launched on 18 December 2002 and is managed by Baring Fund
Managers Limited.
In November 2020, the Company broadened its investment policy to focus on growth
and income from quality companies in the Emerging Europe, Middle East and Africa
("EMEA") region. It also changed its name from Baring Emerging Europe PLC to
Barings Emerging EMEA Opportunities PLC at the same time.
For more information, and to sign up for regular updates, please visit the
Company's website: www.bemoplc.com
LEI: 213800HLE2UOSVAP2Y69
ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the website (or any website) is incorporated into,
or forms part of, this announcement.
This information was brought to you by Cision http://news.cision.com
END
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