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 total return1,#
|
Share
price total return1,#
|
Dividend
per Ordinary Share1,#
|
0.5%
(2022: -29.9%)
|
-8.8%
(2022: -29.1%)
|
17p (2022:
17p)
|
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
Ordinary Share0
|
14.59p
|
(13.16)p
|
1.43p
|
16.77p
|
(289.37)p
|
(272.60)p
|
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.
CALENDAR
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
Expertise
|
Process
|
ESG
Integration
|
Experienced
investment team helps to foster strong relationships with the
companies in which we invest.
|
The
investment team conducts hundreds of company meetings per year,
building long-term relationships and insight.
|
Extensive
primary research and proprietary fundamental analysis, evaluating
companies over a 5-year research horizon with macro considerations
incorporated through our Cost of Equity approach.
|
Fully
integrated dynamic ESG assessment combined with active engagement
to positively influence ESG practices.
|
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 Erdoğan defeat opposition leader Kemal Kılıçdaroğlu 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 Erdoğan
administration may be taking a more orthodox stance have been
welcomed, with the hiring of Mehmet Şimşek, 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 Şimşek'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
of the Business Model
(Franchise)
|
1
|
Employee
Satisfaction
|
Employee
Relations: Staff 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
in Supply Chain
|
Traceability
of 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
Governance Credibility
(Management)
|
4
|
Effectiveness
of Supervisory/ Management Board
|
Sound
Management Structures: Separation of Chair & CEO; Size of
Board; Independence of Board; Frequency
of
Meetings; Attendance Record; Voting Structure; Female Participation
on Boards.
|
5
|
Credibility
of Auditing Arrangements
|
Credible
Auditor; Independent Audit Committee; Qualification to
Accounts
|
6
|
Transparency
& Accountability of Management
|
Access
To Management; Financial Reporting; Tax Disclosure and Compliance;
Appropriate Incentive Structure; Remuneration of Staff; Gender
& Diversity Considerations; Employee Relations
|
Hidden
Risks on the Balance Sheet
(Balance Sheet)
|
7
|
Environmental
Footprint
|
GHG
Emissions; Carbon Intensity; History of Environmental
Fines/Sanctions; Reduction Programmes in Place for Water/
Waste/Resource Intensity, Air Quality; Transition Risks; Physicals
Risks from Climate Change
|
8
|
Societal
Impact of Products/Services
|
Health/Wellness
Implications of Consumption of goods/ services; Product Safety
Issues; Community Engagement
|
9
|
Business
Ethics
|
Anti-competitive
practices; Bribery/Corruption; 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.