Annual Financial Report
09/12/2024 07:00
Barings Emerging EMEA Opportunities PLC
LEI: 213800HLE2UOSVAP2Y69
Annual Report & Audited Financial Statements for the year ended 30 September
2024
The Directors present the Annual Financial Report of Barings Emerging EMEA
Opportunities PLC (the “Company”) for the year ended 30 September 2024.
The full Annual Report and Accounts for the year ended 30 September 2024 can
be accessed via the Company’s website at 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 2024 but is derived from
those accounts. Statutory accounts for the year ended 30 September 2024 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.
Barings Emerging EMEA Opportunities PLC (LSE: BEMO) is pleased to declare a
final dividend in respect of the year ended 30 September 2024 of 12.5 pence
per Ordinary Share, payable on 7 February 2025 to ordinary shareholders on the
register as at 20 December 2024. The ex-dividend date will be 19 December 2024
and the DRIP election date will be 17 January 2025. Further information on
the Company’s dividend can be found in the Chairman’s Statement set out
below.
Financial Highlights
for the year ended 30 September 2024
Annualised NAV total return 1,# Share price total return 1,# Dividend per Ordinary Share 1,#
17.3% (2023: 0.5%) 18.5% (2023: -8.8%) 18.5p (2023: 17p)
For the year ended 30 September 2024 2023 % change
NAV per Ordinary Share 1 706.4p 617.6p 14.4%
Share price 555.0p 483.0p 14.9 %
Share price total return ,1,# 18.5% - 8.8%
Benchmark (annualised) 1 8.5% - 3.4%
Discount to NAV per Ordinary Share 1 21.4% 21.8%
Dividend yield 1,2 3.3% 3.5%
Ongoing charges 1 1.7% 1.6%
Year ended 30 September 2024 Year ended 30 September 2023
Revenue Capital Total Revenue Capital Total
Return per Ordinary Share 18.97p 86.71p 105.68p 14.59p (13.16)p 1.43p
Revenue return (earnings) per Ordinary Share is based on the revenue return
for the year of £2,238,000 (2023: £1,726,000). Capital return per Ordinary
Share is based on net capital gain for the financial year of £10,229,000
(2023: loss £1,557,000). These calculations are based on the weighted average
of 11,796,902 (2023: 11,829,676) Ordinary Shares in issue, excluding treasury
shares, during the year.
At 30 September 2024, there were 11,796,902 (2023: 11,796,902) Ordinary Shares
of 10 pence each in issue which excludes 3,318,207 (2023: 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.
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 the 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 2024 2023 2022 2021 2020
Shareholders’ funds £83m £73m £75m £111m £85m
NAV per Ordinary Share 706.4p 617.6p 632.1p 920.7p 694.7p
Share price 555.0p 483.0p 548.0p 793.0p 587.0p
ROLLING ANNUALISED PERFORMANCE (%)
Annualised returns over the previous three and five year periods to 30
September 2024.
3 years 5 years
NAV Total Return -6.1 -2.6
Share Price Total Return -8.4 -4.9
Benchmark Total Return -5.7 -2.9
Source: Barings, Refinitiv, Bloomberg, MSCI.
CALENDAR YEAR PERFORMANCE (%)
Returns for the previous five calendar years.
2020 2021 2022 2023 2024
NAV Total Return -22.3 36.6 -29.9 0.5 17.3
Share Price Total Return -27.5 39.7 -29.1 -8.8 18.5
Benchmark Total Return -22.6 33.3 -20.1 -3.4 8.5
Source: Barings, Refinitiv, Bloomberg, MSCI.
Chairman’s Statement
It gives me great pleasure to report that our Investment Manager delivered a
significant NAV total return of 17.3%, outperforming the benchmark by 8.8%.
A year ago, I wrote of the notable improvement in your Company’s relative
performance, and this year’s results build handsomely on that achievement.
It gives me great pleasure to report that our Investment Manager delivered a
NAV total return of 17.3%, outperforming the benchmark by 8.8%. This strong
performance in both absolute and relative terms came despite an unchanged
backdrop of diverging fortunes for individual EM EMEA markets and the relative
strength of sterling, without which the return expressed in GBP would have
been still more impressive.
This result positions BEMO Plc in the top decile of investment trusts within
the AIC Global Emerging Markets sector this year – a return which compares
favourably against both broader emerging and developed market indices. This
success was largely attributable to stock selection, based on our Investment
Manager’s fundamental bottom-up investment process.
To mention one example of stock picking generating outperformance, the Turkish
equity market edged lower in the period, and the portfolio’s total exposure
to the country was underweight relative to the benchmark; but the Turkish
stocks that the Company has owned delivered positive double-digit returns.
Stock selection also contributed to a strong increase in net income – up by
29.4% compared to last year. An important contribution to this best income
result since the start of the decade came from the resumption of dividend
payments by the Greek banking sector – a factor which our Investment Manager
expects will make this improving income trend sustainable in a pleasing
complement to the Company’s core objective of capital growth.
These outcomes bear out your Company’s investment case of offering exposure
to high-growth economies in a region that is under-researched and
under-represented in global investment portfolios. The cumulative return of
12% since the 2022 loss caused by the write-down of Russian securities has
lifted performance above the comparator benchmark over five and ten-year
periods.
Investment Portfolio
The portfolio’s holdings in Emerging Europe were some of the strongest
performers, supported by improving economic conditions. A key driver was the
election result in Poland. The Polish equity market rallied strongly on the
return of Donald Tusk as the country’s prime minister, which boosted
business confidence and repaired relations with the European Union. In Greece,
sovereign debt regained its investment-grade credit rating, enabling the
country to tap larger pools of international funding that should serve to
support future growth. This development sealed the remarkable turnaround in
the country’s fortunes.
Another eye-catching turnaround came out of South Africa, where elections
deprived the African National Congress (‘ANC’) of its absolute
parliamentary majority, forcing the party to form a coalition government with
a more pro-market stance and reformist agenda. This outcome produced a strong
market recovery based on hopes that this political change will help the
country overcome the challenges of lacklustre growth, high unemployment and
chronic power outages.
In other markets that fared less well – such as the Middle East where
performance was hit by the weakness of US dollar-pegged currencies – the
portfolio still registered gains thanks to its stock selection in Saudi
Arabia, Qatar and the UAE. As for the Turkish market, investment opportunities
will remain limited as President Erdoğan’s fundamentally welcome return to
economic orthodoxy will depress demand and employment in the near term, with
the benefits of more sustainable and less volatile growth taking longer to
materialise.
Russian Assets
Russian assets in the portfolio continue to be valued at zero, while extensive
sanctions and restrictions on the sale of securities remain in place.
Consequently, there is no exposure to Russia in the Company’s NAV, and
management fees are not being charged on these assets. At the same time, the
Board remains focused on how shareholder value can best be preserved, created
and realised in relation to these holdings. A welcome development this year
has been the opportunity to sell the portfolio’s holdings in three companies
– Magnit, X5 and TCS, realising approximately £2.3 million of value back
into the Company. In addition to this, I am pleased to report that after the
end of the financial reporting period, a further realisation of £1 million
was made from the sale of Nebius N.V. (formerly Yandex N.V.). While these are
positive developments, the Board will continue to value the remaining assets
at zero until circumstances permit otherwise.
The Board remains focused on the value that the Company’s remaining Russian
holdings may generate for shareholders and is actively exploring ways, in
conjunction with the Investment Manager, to divest these assets while ensuring
compliance with global sanctions.
Discount
The discount as at 30 September 2024 was 21.4% and the average discount during
the period was 21.8%. This compares with a discount of 21.8% as at 30
September 2023.
The average discount of the Company has widened since the write-down of
Russian assets in the first quarter of 2022. This, along with elevated levels
of broader market volatility within our investment universe and global equity
markets, has also heightened discount volatility. This impact is not unique to
your Company and has affected many investment trusts.
The Board continues to focus on discount management, aiming to contain
discount volatility. While share buybacks remain an option available for the
Company to help manage the discount, they are significantly less effective
during periods of elevated market volatility and need to be considered in the
context of the broader strategy for discount control. As a result, the Company
has not bought back any shares during the financial year.
Discount Control Mechanism and Strategic Options
The Company has now entered the last year before the discount and performance
targets set in October 2020 – in conjunction with the broadening of the
investment mandate – will be tested. While the portfolio’s outperformance
since 2022 puts the performance target within realistic reach, the Board sees
a strong likelihood of the discount management target being missed. While we
cannot predict the position in a year, the Board will keep the appropriateness
of the discount control mechanism under review and, if the September 2025
targets are not met, consider the case for a tender offer alongside other
strategic options, taking account of the Company’s remaining Russian assets.
Further detail is available on page 8 of the Annual Report and Accounts.
Gearing
There were no borrowings during the period. As of 30 September 2024, there was
net cash of £3.8 million (30 September 2023: £4.0 million). The Company
does not currently use a loan facility but keeps its gearing policy under
review.
Dividends
In the financial year under review, the income account generated a return of
18.9 pence per Ordinary Share, compared with 14.6 pence last year. This
increase in income has followed a year of strong revenue generation from the
Company’s capital investments.
The Directors are proposing an increased final dividend of 12.5 pence per
share (2023: 11 pence per share). In respect of the six months ended 31 March
2024, the Company paid an interim dividend of 6 pence per share (2023: 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 3.3%.
Board Succession
Nadya Wells has notified the Company that, having completed a nine-year term
on the Board, she will be standing down and resigning as a Director after the
2025 AGM. Nadya joined the Board in 2015 and has been an active and highly
effective participant in contributing to the management of the Company’s
affairs. She will be greatly missed by both the Board and Investment Manager.
We extend our appreciation and thanks to her.
After careful deliberation, the Board has decided to not hire a replacement at
this time. This decision reflects the Board’s commitment to containing
costs, and its view that the current Board’s experience and structure are
adequate for the ongoing management of the Company.
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, 23 January 2025 at 10:00
a.m. 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
The global backdrop for the Company’s investment activity looks set to be
one of unsynchronized economic activity and persistent geopolitical
uncertainty. While a soft-landing scenario looks increasingly likely in the
US, investors and company managements are weighing expectations for China’s
economic growth, European stagnation, and the continuing wars in Ukraine and
the Middle East, where developments could hinge on the position of the
incoming administration in the US. The resulting market focus on top-down and
geopolitical developments should enhance opportunities for bottom-up stock
selection.
The economic impact of these conflicts is felt mainly through their effect on
energy prices – a key driver for investment returns in the Middle East. Over
the past year, lower oil prices have led some countries in the region to
recalibrate ambitious projects, such as Saudi Arabia’s Vision 2030, and
prioritize domestic projects in sovereign resource allocation. This is a
welcome trend for investors in the region’s markets – not least for
showing the seriousness of these Gulf nations’ long-term strategies for
diversifying their economies away from hydrocarbons. The benefits of this
shift are already starting to take form on the region’s stock exchanges,
where a growing number of companies are coming to market through initial
public offerings each year.
Amid all the uncertainty, the economic environment should be supportive. In
the US and most other developed markets, inflation has been brought under
control without causing a recession, allowing central banks to stimulate
activity by reducing interest rates. Lower rates will squeeze the
profitability of the region’s financial services companies that form the
portfolio’s single largest sector weighting. This negative effect will be
partially offset, however, by rising consumption and a reduction in credit
risks for most banks. The recently announced Chinese stimulus to boost
domestic consumption may help economies globally, with EM EMEA being no
exception as the region is an important supplier of natural resources imported
by China.
Promotional Activity
The Board and Investment Manager have an ongoing communications programme that
seeks to maintain the Company’s profile and investment remit, particularly
among 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, views, 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
click on ‘Register for email updates’.
Frances Daley
Chairman
6 December 2024
REPORT OF THE INVESTMENT MANAGER
Market Summary
Emerging European, Middle East and African (EMEA) equity markets advanced over
the period, with the MSCI EM EMEA index increasing 8.5% in GBP terms. Against
this, the portfolio significantly outperformed over the financial year, with
the Company’s NAV increasing by +17.3% in GBP terms (net dividend
re-invested), providing a return that compares favourably against a range of
international benchmarks. This positive result was achieved despite the
considerable strengthening of the pound relative to the region’s currencies
– dragging down the Company’s returns when expressed in GBP terms.
True to the EMEA region’s diverse geography, demographics and economic
development, there were striking differences in returns as between individual
markets. These differing fortunes had various causes, from monetary and fiscal
policies, to elections and geopolitical tensions. This in turn created a real
opportunity for our active approach not only to outperform on a relative basis
but also to secure capital appreciation in absolute terms for the Company’s
shareholders.
Markets in Central and Eastern Europe were some of the best performers across
EMEA with Poland, Hungary and Greece returning ~20-30% in GBP terms. Whilst
broadly these markets benefitted from a strong economic rebound, there were
also specific drivers at play.
Poland held elections that resulted in a clean break from eight years of
populist rule under the Law and Justice party (PiS), in favour of the Civic
Platform party led by Donald Tusk at the core of a new governing coalition.
This pro-Europe shift has thawed tensions between Poland and the European
Union, which in turn has permitted the release of substantial funding from the
bloc’s post-pandemic recovery fund. Market valuations of the country’s
financial sector companies have been a notable beneficiary of the resulting
improvement in business confidence. Elsewhere in Emerging Europe, Greece was
at one time perceived to be economically and fiscally dysfunctional, but the
country’s debt bailout and subsequent investment by the EU have born fruit
in revived economic vibrancy. This has resulted in international credit rating
agencies returning Greek government bonds to investment-grade status,
rewarding the business-friendly and fiscally responsible government led by
Prime Minister Kyriakos Mitsotakis, which has won a strong mandate from the
Greek electorate.
Another country in our region that saw a remarkable change in fortunes was
South Africa, which generated a return of more than 20% (in GBP terms) in the
final six months of the financial year. This positive development revolved
around what has been a significant election for South Africa, ending the near
30-year uninterrupted sole rule of the African National Congress (ANC) party.
By forcing the ANC to seek coalition partners to govern, this election result
has led to the formation of a Government of National Unity (GNU), comprising
the ANC and the centrist Democratic Alliance party. This has sparked hopes of
growth-friendly structural reforms and prudent macroeconomic policies.
In Turkey and the Middle East, equity markets ended the year flat or
marginally weaker, with returns to international investors dented by weaker
currencies – stemming from the dollar pegs in Gulf countries (which are also
exposed to geopolitical tensions) and persistent high inflation in Turkey. Our
stock selections in these markets nevertheless delivered capital gains for our
shareholders (see below for more detail on these top-down and bottom-up
themes).
EMEA Market Performance & Currency Returns – 1 October 2023 to 30 September
20241
Market Market Return Currency Currency Return
Poland 32.5% Polish Zloty 3.7%
South Africa 24.4% South African Rand -0.1%
Hungary 24.1% Hungarian Forint -5.8%
Greece 19.4% Euro -3.9%
Qatar 1.2% Qatari Riyal -8.8%
Saudi Arabia 1.2% Saudi Riyal -8.8%
Kuwait -0.9% Kuwaiti Dinar -7.7%
Czech Republic -2.0% Czech Koruna -7.0%
Turkey -2.8% Turkish Lira -26.9%
United Arab Emirates -4.7% Emirati Dirham -8.8%
Egypt -15.7% Egyptian Pound -41.6%
1 Market Return in GBP, based on MSCI indices, Currency Returns vs. GBP
Source: Barings, Refinitiv, Bloomberg, MSCI. 30 September 2024
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.
We have regularly emphasised that the region in which we invest offers not
only unrecognised growth potential, but also attractive levels of income.
During most of the present decade, income levels have been satisfactorily
steady; but this financial year has seen a jump in income not seen since the
height of the Russian dividend boom at the end of the 2010s.
Investments across the portfolio not only exceeded market expectations in
growth, but also returned capital through higher dividends and share buybacks,
reflecting improving corporate governance. Examples here have included Saudi
Telecom (STC) and Emaar Properties, which paid special dividends to improve
capital allocation after what has been a particularly strong year.
Furthermore, in another welcome development, income has returned from our
investments in the Greek banking industry where the nation’s four leading
banks – which had been hit hard by the country’s debt crisis – paid out
dividends for the first time since 2008 after receiving the green light from
the European Central Bank. This was an important milestone for an economy that
is returning to the global stage.
We believe that these developments should underpin the attractive dividend
yield of the Company’s shares not just for this financial year, but for
years to come, solidifying its place as a strong income diversifier.
Investments across the portfolio not only exceeded market expectations in
growth, but also returned capital through higher dividends and share buybacks,
reflecting improving corporate governance.
Through this year we have managed to add value in South Africa by remaining
selective in our holdings, focusing on well-managed companies that can
effectively operate in what has been an ever-changing macro picture.
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 negative effects on performance from major macro dislocations.
Middle East: Rising Tensions
A year on from the attack by Hamas on Israeli soil, the regional landscape has
shifted considerably, in what remains the world’s most important
oil-exporting region, accounting for one-third of global supply. Despite
persistent escalation fears, capital markets in the region have so far
remained passive. However, the current direction of travel points to greater
risk of escalation and volatility for the region and energy markets.
For these reasons, we have taken profits in some of our real estate
investments in the United Arab Emirates (UAE) where rising geopolitical
tensions and significant increases in real estate prices have left this sector
exposed. In contrast, we have concentrated the portfolio’s Middle East
exposures in companies that are idiosyncratic and aligned with structural
themes. Examples include ADNOC Drilling in the UAE and, in Saudi Arabia,
private hospital operator HMG and the country’s stock exchange, Tadawul.
South Africa: Elections and formation of the Government of National Unity
This year, South Africans joined billions globally who were casting their
ballots. The South African election, however, stood out in the context of the
country’s history, where against the backdrop of low growth, high
unemployment and routine power blackouts, increasing numbers of voters had
begun to look for change. As a result, the ruling African National Congress
(ANC) party, which once spearheaded the resistance to apartheid, saw its share
of the vote drop to 40%, forcing it to seek coalition partners to govern. The
outcome was the formation of a Government of National Unity (GNU), with the
ANC joining with the Democratic Alliance party, a centrist party which
campaigned on a more pro-market reform stance. The coalition has proposed a
lower budget deficit and a deregulated labour market.
Thus far, markets have responded positively, with equities performing strongly
on the local exchange, government bond yields falling, and the rand
appreciating. In addition, the nation’s energy crisis seems to be abating as
load shedding has ceased since the election, boosting business confidence.
While the ultimate effectiveness of this GNU is yet to be proven, pragmatism
appears to be prevailing, raising hopes that the much-needed reforms South
Africa needs can be implemented. During this year we have managed to add value
in South Africa by remaining selective in our holdings, focusing on
well-managed companies that can effectively operate in what has been a rapidly
shifting macro environment. Looking ahead, we continue to monitor ongoing
developments and believe that, as change translates into economic expansion,
the breadth of opportunity available in South Africa will allow for greater
variety in our investments in what remains a region with untapped potential.
Turkey: A bitter pill to swallow
A strong contributor to relative returns this year has been Turkey, which
through very careful stock selection has delivered positive double-digit
returns in our investments against a negative equity market performance of
-2.8% (in GBP) over the financial year.
Looking deeper, we saw domestic investors flocking to the local stock market
to protect themselves from sky-high inflation, which reached more than 75% –
a byproduct of ultra-loose monetary policy and degradation of central bank
independence. In response to these pressures, President Recep Erdogan has
seemingly re-embraced orthodox monetary policy, appointing the well-respected
Mehmet Simsek to be Minister of Treasury and Economics. The move represents a
substantial shift in economic approach which, combined with an interest rate
hike to 50%, has tried to convince investors that Turkey is prepared to
rebalance its economy.
Asset Allocation
Portfolio Country Weight (%) Portfolio Sector Weight
(%)
Saudi Arabia 29.7% Financials 48.3%
South Africa 26.4% Materials 15.0%
U.A.E. 11.5% Comm. Services 9.0%
Poland 9.5% Energy 6.4%
Turkey 4.8% Information Technology 6.1%
Hungary 4.6% Consumer Staples 4.9%
Greece 4.6% Health Care 3.6%
Qatar 4.0% Real Estate 3.1%
Kuwait 3.4% Con. Discretionary 2.6%
Czech Republic 1.5% Industrials 0.9%
Source: Barings, Refinitiv, Bloomberg, MSCI. 30 September 2024.
The first fruits of this policy shift are appearing, with inflation projected
by the Central Bank to fall below 40% by the end of 2024 from 65% a year
earlier. However, the economy will need to rapidly cool to get inflation back
to truly normalised levels. As interest rates begin to bite, consumers face a
painful period of weaker consumption and higher unemployment. Already,
economic growth has slowed to the lowest pace in over four years, underscoring
the adverse impact of this necessary macroeconomic stabilization. The key
question as the fever cools is whether the central bank and President Erdoğan
will stay the course and administer the medicine the economy desperately
needs. Erdoğan’s Ruling Justice and Development party (AKP) has its eye
firmly fixed on the 2028 elections and remains acutely aware that its
popularity has waned considerably as economic conditions have darkened for
many Turks. This creates the risk of a policy relapse that would be disastrous
for the economy. In our view, however, the government will press on with the
painful economic rebalancing. Further progress will have the positive effect
of returning Turkey to the spotlight for international investors. This in turn
would enhance opportunities for investment returns underpinned by the
country’s strong potential for long-term structural growth owing to its
young and vibrant population, as well as world-leading management teams that
have continued to thrive under often fraught conditions.
In response to these developments, we have taken profits from several
companies within the portfolio that have delivered significant returns. For
the moment, however, we have chosen to reinvest those proceeds elsewhere
across the region whilst we wait for the impacts of the oncoming economic
slowdown to take effect.
Central Europe — Poland: The new face of Europe
After eight years of populist rule by the Law and Justice party (PiS), Donald
Tusk and his centrist Civic Platform returned to office following a fiercely
contested election. Tusk’s campaign was centred on the promise to “clean
up” Poland in what he has called an “Iron Broom” approach. The new
pro-European government wasted no time sweeping aside PiS loyalists while
restoring key pillars of governance such as reinstating judicial independence.
This has also served to reset terms with the EU, which had been locked in a
long-running dispute with Poland over the rule of law since 2018. The reset
has allowed for the unfreezing of substantial funding that includes €60
billion from the bloc’s post-pandemic recovery fund.
The reset between the EU and Poland also comes at a time when the EU’s
leadership has been tested, both politically and economically. Politics in the
EU’s largest member states – France and Germany – have become fraught
with political tensions feeding on economic pain, as high inflation has left
lasting scars on Europe consumers. In contrast, Poland is now seeing growth
projected to accelerate to 4.1% in 2025, with its economy benefitting from
booming trade and population growth. These positive macroeconomic trends are
accompanied by a deepening of the country’s capital market. That depth was
illustrated in September 2024 by the IPO of Polish convenience food retailer
Zabka, one of the year’s largest share floats – not only in the EMEA
region but also in Europe as a whole. Poland’s superior economic performance
has not gone unnoticed, attracting investors whose interest produced a more
than 30% gain on the Warsaw stock exchange (in GBP) over the period, making it
one of the very few global indices to outperform the S&P 500.
This was also a unique year for the Polish zloty. Not only did the Polish
currency appreciate vs the euro, in an unprecedented move it also gained more
than 10% relative to both the Czech koruna and the Hungarian forint, thereby
outperforming its closest regional currency peers by a wide margin. These
currency moves reflect a growing structural divergence. In contrast to the
considerable export dependency of Central Europe’s “small open
economies” where the automotive sector in particular plays an outsized role,
Poland boasts not only what is probably Europe’s healthiest consumer market,
but also benefits from a more diversified and service-oriented export sector.
In addition, Poland’s constitutionally enshrined sovereign debt ceiling of
60% of GDP has served as a limiting factor to government bond issuance over
the years forcing its government to balance fiscal largesse with efficiency
drives and tax collection. This position of strength has given Poland the
ability to build out a broad-based military upgrade by placing more than $40
billion worth of orders for US defence equipment, enabling the country to
conduct a more assertive foreign policy and play a more influential role in
the EU and NATO.
Company Selection
Our team regularly engages with management teams and analyses industry
competitors to gain 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.
Key Performance Drivers in the Period
Stock selection was the key driver of the portfolio’s positive relative
return over the period, whilst sector asset allocation had a small negative
impact.
On a sector basis, financials were the largest contributor to relative returns
followed by energy and the consumer sectors, whilst utilities and
communication services detracted. On a country basis, almost all countries
contributed to outperformance, with Turkey, Poland, and the countries
comprising the Middle East being notably strong. In contrast, Kazakhstan was
the only country where our holdings made a negative contribution to the
portfolio’s performance.
In Turkey, we managed to generate significant positive relative returns
through stock selection. Supermarket operator BIM performed exceptionally well
as the company continues to deliver strong results with market-share gains,
margin improvement and solid free-cash-flow generation with the management
team adding to its exceptional track record of creating shareholder value.
Turkish financials Yapi Kredi and Akbank also delivered positive relative
returns as the market priced in a strong net interest margin recovery and
robust fee income from falling inflation.
Alongside Turkey, South Africa was the strongest market in the region
benefitting from the potential for structural reform following the outcome of
elections earlier this year. In similar fashion to Turkey, despite being
underweight, the portfolio delivered strong relative outperformance. The
largest single stock contributor to this positive outcome was Capitec, whose
well-regarded management team delivered on market share gains and posted
strong results despite the difficult social and economic backdrop of low
growth, high inflation, and debilitating energy and logistical infrastructure.
Technology company Naspers also added to relative returns in South Africa,
following an update on the company’s share buyback program. These positive
contributions to relative return were partially offset by telecoms company MTN
which suffered from currency devaluation in Nigeria, a major market for the
company.
In Poland, miner KGHM was another notable contributor benefitting from a rally
in copper and silver prices given the favourable supply-demand dynamics. The
company delivered strong results during the year with better free cash flow
generation and declining net debt. Furthermore, investors appear more
encouraged by the new executive team’s priorities on cost containment and
the potential to implement a more disciplined capital allocation framework.
Financial giant PKO Bank and major logistics company InPost also performed
well as the companies benefitted from improving business and consumer
confidence. In Greece, we focused our attention on the banking sector, which
benefitted from investor interest in the nation’s macro recovery and its
return to investment-grade status.
Throughout the year we maintained a persistent underweight to Middle Eastern
markets except the UAE, choosing to focus our selection on specific bottom-up
opportunities. This served to benefit relative returns with sector allocation
supporting relative performance. In the UAE, our investment in ADNOC Drilling
was a highlight, as the market rewarded higher growth potential in its oil
field services (OFS) segment, whilst growth in “rigs” has served to
underpin visibility in earnings and free cash flow. This positive momentum led
to ADNOC becoming a component of the MSCI EM index last May, with the
company’s share price further benefitting from the resulting inclusion of
the stock in passive investment portfolios. UAE real estate developer Aldar
also performed well as investors priced in the structural demand for property
through population growth and strong employment trends.
In Saudi Arabia, a more cautious approach anchored by our valuation discipline
and growth outlook led us to avoid investing in index heavyweight ARAMCO –
which we believed to be richly valued and offering limited growth. This
decision made a positive contribution to relative returns, as did our indirect
exposure to the ARAMCO SPO and broader domestic capital market deepening with
the national stock exchange operator Tadawul. In contrast, renewables utility
company ACWA Power was the single largest detractor in the portfolio. This
company is a unique prospect within the region, but we believe that its
valuation has run well ahead of its growth trajectory. In our view, investors
are paying significant multiples for what is an ever-increasing backlog that
includes a variety of desalination and power projects that have yet to come
online both domestically and abroad.
In Kazakhstan, our holding in fintech and e-commerce operator Kaspi detracted
from returns following the issuance of a short seller’s report alleging that
the company has undisclosed exposure to Russia. Our inability to accurately
assess these risks ultimately drove us to divest our entire exposure.
A differentiated and innovative investment process driven by fundamental
bottom-up analysis – with a strong focus on environmental, social and
governance factors.
Outlook
Looking ahead to the next financial year, we would highlight some positive
economic developments – from the prospective US soft landing’ to the
recently announced Chinese stimulus – which nevertheless leave ample grounds
for caution. In particular, geopolitical risks are compounded by the
unpredictable stance of the incoming US administration which will play a key
role in determining the way forward in both Ukraine and the Middle East. These
conflict situations present binary risks to the upside and downside. Progress
towards conflict resolution could deliver a “peace dividend” in the form
of declining volatility and risk premiums with investment returns benefiting.
It is in times such as these that we believe active management can add the
most value for shareholders.
Our strategy is to balance cautious country and sector allocation in the face
of these risks with continued focus on the earnings profile of the individual
companies in our portfolio, seeking out management teams with strong records
of growth, prudent capital allocation policies, and returns to shareholders.
Areas which we are actively following include assessing the impact of falling
real interest rates, which is an important consideration within the financial
sector. Whilst several companies in the banking sector will be affected by
falling net interest margins, some will be less sensitive than others, and in
some instances will benefit. In addition, falling yields and a weaker US
dollar also provide a supportive environment for investments in precious
metals, which remain key in economies such as South Africa.
At the consumer level, declining food inflation combined with lower interest
rates should support households from Emerging Europe to South Africa. We
believe that as food prices normalise there is greater potential for
discretionary spending to return in key areas of consumption. At the same
time, patterns of consumer behaviour are evolving, with ‘premiumisation’
on the rise (buy less, buy better), and digital mediums becoming more popular
relative to physical domains. This creates a need for businesses to adapt,
understanding what is driving change and how the changes affect what they sell
and do. This environment relies heavily on best-in-class management to
navigate in unsettled waters, and underscores why high-quality management
teams are a key attribute we seek in the companies in which we invest.
INVESTMENT APPROACH
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
An 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.
ENGAGEMENT CASE STUDY: Sabanci Holding (Turkish Conglomerate)
We regularly engage with companies with the aim of improving corporate behaviour or enhancing disclosure levels.
ENGAGEMENT OVERVIEW · We engaged with Sabanci, a Turkish Financial and industrial conglomerate, to encourage management to adopt an internationally acknowledged share buyback standard.
OBJECTIVE: Change Behaviour · Our aim was to encourage the company to adopt an internationally recognised buyback programme, which we believe would create shareholder value by improving its valuation and reducing the company’s discount — whilst improving transparency.
OUTCOME: Successful · Under the company’s pre-existing model, Sabanci applied a buy-back strategy but refrained from cancelling bought back shares. · This approach did not meet international standards and, in our view, contradicted management claims that its business was a leader in Corporate Governance. · Following our discussions with management, our line of argumentation was recognised, and agreed that this approach could improve shareholder value. · Subsequent to this engagement, the current buyback
program will come to end in November 2024, and will be replaced by a new scheme that will feature share cancellations (subject to AGM approval).
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 below).
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 A dynamic, forward-looking approach Active engagement over exclusion
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 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. 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.
finance analysis. This influences both our quality assessment of a company as well as its valuation and is therefore integral to decision-making
.Chart A – Fundamental Research: Example ESG Assessment
Key Topics Data / Issues to Consider
Sustainability 1 Employee Employee Relations: Staff Turnover; Strikes; Remuneration of Staff; Fair Wages;
of the Satisfaction Injuries; Fatalities; Unionised Workforce; Employee Engagement,
Business Diversity & Inclusion.
Model (Franchise)
2 Resource Water Usage; GHG Emissions; Energy; Transition Risks.
Intensity
3 Traceability/ Traceability of Key Inputs; Investments in Protecting the Business from External
Security in Supply Threats, e.g., Cyber Security, Physical Risks from Climate Change; Backward
Chain Integration (Protection of Key Inputs); Transition Risks in Supply Chain.
Corporate 4 Effectiveness Sound Management Structures: Separation of Chair & CEO; Size of Board;
Governance of Supervisory/ Independence of Board; Frequency of Meetings; Attendance Record; Voting
Credibility (Management) Management Structure; Female Participation on Boards.
Board
5 Credibility Credible Auditor; Independent Audit Committee;
of Auditing Qualification to Accounts.
Arrangements
6 Transparency & Access To Management; Financial Reporting; Tax Disclosure and Compliance;
Accountability of Appropriate Incentive Structure; Remuneration of Staff; Gender & Diversity
Management Considerations; Employee Relations.
Hidden 7 Environmental GHG Emissions; Carbon Intensity; History of Environmental Fines/Sanctions;
Risks on the Footprint Reduction Programmes in Place for Water/Waste/Resource Intensity, Air Quality;
Balance Sheet (Balance Transition Risks; Physical Risks from Climate Change.
Sheet)
8 Societal Impact Health/Wellness implications of Consumption of goods/services; Product Safety
of Products/ Issues; Community Engagement.
Services
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 company valuation
ESG influences the company-specific risk premium that forms a portion of the
overall discount rate attributed to the company for valuation and identifying
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”), 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.
For further detail on our approach to ESG integration and our Carbon Cost
assessment, please use the links provided in the Annual Report and Accounts.
Baring Asset Management Limited
Investment Manager
6 December 2024
Detailed Information
Barings Emerging EMEA Opportunities PLC's annual report and accounts for the
year ended 30 September 2024 is available at
https://www.barings.com/en-gb/investment-trust/the-trust/literature/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
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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