Annual Financial Report
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 return1,# | Share price total return1,# | Dividend per Ordinary Share1,# |
| 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 Share1 | 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 Share1 | 21.4% | 21.8% |
|
| Dividend yield1,2 | 3.3% | 3.5% |
|
| Ongoing charges1 | 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 approach. | Fully integrated dynamic ESG assessment combined with active engagement to positively influence ESG practices. |
| 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 finance analysis. This influences both our quality assessment of a company as well as its valuation and is therefore integral to decision-making | 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. |
.Chart A – Fundamental Research: Example ESG Assessment
| Key Topics | Data / Issues to Consider | ||
| Sustainability (Franchise) | 1 | Employee | Employee Relations: Staff Turnover; Strikes; Remuneration of Staff; Fair Wages; |
| 2 | Resource | Water Usage; GHG Emissions; Energy; Transition Risks. | |
| 3 | Traceability/ | Traceability of Key Inputs; Investments in Protecting the Business from External | |
| Corporate (Management) | 4 | Effectiveness | Sound Management Structures: Separation of Chair & CEO; Size of Board; |
| 5 | Credibility | Credible Auditor; Independent Audit Committee; | |
| 6 | Transparency & | Access To Management; Financial Reporting; Tax Disclosure and Compliance; | |
| Hidden (Balance | 7 | Environmental | GHG Emissions; Carbon Intensity; History of Environmental Fines/Sanctions; |
| 8 | Societal Impact | Health/Wellness implications of Consumption of goods/services; Product Safety | |
| 9 | Business Ethics | Anti-competitive practices; Bribery/Corruption; Whistle-Blower Policy; Litigation | |
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.
Latest directors dealings
- 17 hours ago The Renewables Infrastructure Group Limited
- 17 hours ago The Renewables Infrastructure Group Limited
- 17 hours ago Smurfit Westrock (DI)
- 18 hours ago Menhaden Resource Efficiency
- 18 hours ago BP