Annual Financial Report
08/12/2023 07:00
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 return 1,# Share price total return 1,# Dividend per Ordinary Share 1,#
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 Share 1 617.6p 632.1p -2.3%
Share price 483.0p 548.0p -11.9%
Share price total return 1,# -8.8% -29.1% -
Benchmark (annualised ) 1 -3.4% -20.1% -
Discount to NAV per Ordinary Share 1 21.8% 13.3% -
Dividend yield 1,2 3.5% 3.1% -
Ongoing charges 1 1.6% 1.6% -
Year ended 30 September 2023 Year ended 30 September 2022
Revenue Capital Total Revenue Capital Total
Return per Ordinary Share 0 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 Fully integrated dynamic ESG assessment combined with active engagement to positively influence ESG practices.
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 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.
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