TIDMBEMO
Barings Emerging EMEA Opportunities PLC
LEI: 213800HLE2UOSVAP2Y69
Annual Report & Audited Financial Statements for the year ended 30 September
2022
The Directors present the Annual Financial Report of Barings Emerging EMEA
Opportunities PLC (the "Company") for the year ended 30 September 2022. The
full Annual Report and Accounts for the year ended 30 September 2022 can be
accessed via the Company's website, www.bemoplc.com.
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 30 September 2022 but is derived from
those accounts. Statutory accounts for the year ended 30 September 2022 will be
delivered to the Registrar of Companies in due course. The Auditors have
reported on those accounts; their report was (i) unqualified, (ii) did not
include a reference to any matters to which the Auditors drew attention by way
of emphasis without qualifying their report and (iii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act 2006. The text of
the Auditors' report can be found in the Company's full Annual Report and
Accounts on the Company's website at www.bemoplc.com.
Financial Highlights
for the year ended 30 September 2022
Share price total Dividend per Ordinary
Annualised NAV total return1,# return1,# Share1,#
-29.9% (2021: +36.6%) -29.1% (2021: +39.7%) 17p (2021: 26p)
For the year ended 30 September 2022 2021 % change
NAV per Ordinary Share1 632.1p 920.7p -31.3%
Share price 548.0p 793.0p -30.9%
Share price total return1,# -29.1% +39.7% -
Benchmark (annualised )1 -20.1% +33.3% -
Discount to NAV per Ordinary 13.3% 13.9% -
Share1
Dividend yield1,2 3.1% 3.3% -
Ongoing charges1 1.6% 1.6% -
Year ended 30 September 2022 Year ended 30 September 2021
Revenue Capital Total Revenue Capital Total
Return per 16.77p (289.37)p (272.60)p 23.86p 225.16p 249.02p
Ordinary
Share0
Revenue return (earnings) per Ordinary Share is based on the revenue return for
the year of £2,014,000 (2021: £2,912,000). Capital return per Ordinary Share is
based on net capital loss for the financial year of £34,746,000 (2021: gain £
27,476,000). These calculations are based on the weighted average of 12,007,165
(2021: 12,202,696) Ordinary Shares in issue, excluding treasury shares, during
the year.
At 30 September 2022, there were 11,930,201 (2021: 12,044,780) Ordinary Shares
of 10 pence each in issue which excludes 3,318,207 (2021: 3,318,207) Ordinary
Shares held in treasury. The shares held in treasury are not included when
calculating the weighted average of Ordinary Shares in issue during the year.
All shares repurchased during the year have been or are being cancelled.
1 Alternative Performance Measures ("APMs") definitions can be found in the
Glossary below.
2 % based on dividend declared for the full financial year and share price at
the end of each financial year.
# Key Performance Indicator.
* The benchmark is the MSCI EM EMEA Net Index. Prior to 16 November 2020, it
was the MSCI EM Europe 10/40 Net Index.
Five Year Financial Record
At 30 September 2022 2021 2020 2019 2018
Shareholders' funds £75m £111m £85m £116m £108m
NAV per Ordinary 632.1p 920.7p 694.7p 930.8p 824.8p
Share
Share price 548.0p 793.0p 587.0p 846.0p 714.0p
ROLLING ANNUALISED PERFORMANCE (%)
3 years 5 years
NAV Total Return -9.4 -3.1
Share Price Total -10.5 -3.0
Return
Benchmark Total Return -6.2 -0.6
Source: Barings, Factset.
ANNUAL PERFORMANCE (%)
2018 2019 2020 2021 2022
NAV Total Return -2.6 17.8 -22.3 36.6 -29.9
Share Price Total -4.0 24.3 -27.5 39.7 -29.1
Return
Benchmark Total Return 1.6 15.9 -22.6 33.3 -20.1
Source: Barings, Factset.
Chairman's Statement
This year proved to be extremely volatile. Russia's invasion of Ukraine
prompted significant selling across equity markets globally. Emerging EMEA
equities also suffered amidst the broader macroeconomic headwinds of sharply
higher inflation and fears of a global economic slowdown.
After the strong performance in the prior financial year, it is incredibly
disappointing to report a significant decline in the Company's net asset value
(NAV) over the period.
This year proved to be extremely volatile. Russia's invasion of Ukraine
prompted significant selling across our investment region and equity markets
globally. Emerging EMEA equities then suffered amidst the broader macroeconomic
headwinds of sharply higher inflation and fears of a global economic slowdown.
Against this backdrop, the Company's net asset value fell significantly, and
the portfolio underperformed the benchmark. This result was largely
attributable to our investments in Russian securities, which were written down
to zero following exchange closures and sanctions. This took place in two
phases and reflected the evolving situation at the time. Russian securities
listed on the Moscow Exchange were valued at zero as of the 28th February
following restrictions of sales; whilst depositary receipts and U.S. listed
Russian stocks were valued at zero on the 2nd March, after they had been
suspended from trading. As of the date of this report, these exceptional
circumstances have not changed and, as a result, the Board has taken the
decision to continue valuing these assets at zero. Consequently, there is no
exposure to Russia in the Company's net asset value and Management fees are not
being charged on these assets. Further information of the Company's Russian
holdings can be found in the full Annual Report and Accounts for the year ended
30 September 2022.
Whilst the write-down of Russian securities in the portfolio had a large
negative impact on net asset value, the Company benefitted from the broadening
of the investment mandate that was approved by Shareholders in November 2020.
The successful diversification into markets such as South Africa and the Middle
East reduced exposure to Russia significantly.
Performance
The NAV total return over the year was -29.9% compared to the Benchmark return
of -20.1%. For comparison, broader emerging markets were also markedly weaker
over the period, declining -13.2%1. This illustrates the wider-ranging impact
of global headwinds such as high inflation and economic growth slowdown.
The Company's investments in Russia were responsible for the vast majority of
the absolute decline in net asset value. Strong returns elsewhere in the
investment universe, particularly in the Middle East, meant that the portfolio
excluding Russia would have registered a small positive return over the year.
Whilst the portfolio had an overweight allocation to Russia before the invasion
on 24 February 2022, this had been reduced during January and February.
However, the impact on the portfolio was nevertheless significant, with Russian
exposures accounting for approximately 6.5% of relative underperformance over
the period.
Another factor in the underperformance against the Benchmark was our
underweight allocation to energy stocks, a strategic decision made at the time
of the 2020 change of mandate, for environmental reasons. This was driven
primarily by not owning Saudi Aramco, as the shares rallied sharply against a
backdrop of high oil prices.
In contrast, it is pleasing to report that some of the Company's investments in
the newer markets of the Middle East were some of the best performers in
absolute terms, not only in EMEA but across equity markets globally. On a
relative basis, some of the strongest performers were Middle Eastern Banks,
which rallied against a backdrop of rising interest rates and an improving
economic picture. This benefitted the Company's holdings in Qatar National
Bank, Saudi National Bank and Al Rajhi. Despite this, the Financials sector had
a negative impact on relative performance in aggregate, primarily due to the
write down of two Russian holdings but also because of the outperformance of a
small number of other companies in the sector, which are not held in the
portfolio.
The portfolio's relative underperformance over the last year has had a
significant impact on three and five year performance numbers, with the Company
lagging the benchmark across both periods. The longer-term performance of the
Company however, has been good, generating a cumulative NAV total return of
52.9% over 7 years and 13.6% over 10 years, both of which are ahead of the
benchmark.
1 As defined by the MSCI Emerging Markets index, in GBP terms.
Environmental, Social and Governance
The Investment Manager continues to incorporate Environmental, Social and
Governance ("ESG") parameters as a key element of the investment process and
company analysis, to reflect improving or deteriorating corporate standards
that may influence a company's value. This approach enables the Investment
Manager to uncover potential unrecognised investment opportunities, whilst also
mitigating risks. The Investment Manager also undertakes active engagement to
influence positively ESG practices and improve ESG disclosures.
During the year, the Investment Manager began a process to enhance their ESG
approach by incorporating a Carbon Cost assessment for companies within the
investment universe. This enhancement seeks to quantify potential risks and
costs associated with high carbon-emitting companies, such as those most
exposed to carbon emissions trading systems (ETS) and other carbon taxes. By
including this additional risk, the Investment Manager believes they are better
positioned to value companies more accurately and deliver excess returns over
the medium term.
The Board shares the Investment Manager's view that ESG factors are among some
of the most important variables that can impact an investment's risks and
returns over time. Further detail on the Investment Manager's ESG process,
including the Carbon Cost assessment, can be found in the Investment Manager's
Report.
Discount Management
The Board continues to pursue an active discount management strategy, with the
aim of containing discount volatility and providing liquidity to the market.
During the year, 114,579 Ordinary Shares were bought back at an average price
of £6.24 per Ordinary Share, for a total cost of £715,000. All Ordinary Shares
repurchased during the year have been or are being cancelled. The share
buybacks added approximately 1.0 pence per Ordinary Share to NAV, accounting
for just under 0.2% of the total return to Shareholders.
The discount at year-end was 13.3% and the average discount during the year was
15.3%. At the end of the prior financial year the discount was 13.9% and the
average during that year 13.1%. The average discount over the period has
widened, primarily due to increased levels of market volatility across our
investment universe and equity markets globally. This has impacted discounts
for many investment trusts and is not unique to our Company.
Whilst share buybacks continue to be a useful tool in helping to manage the
discount, they are significantly less effective during periods of elevated
market volatility, as has been the case in recent months. The Barings Equity
Dealing team discuss the management of the discount with the Company's
corporate broker JP Morgan on a daily basis with the aim of containing the
discount over the five-year calculation period, which ends in September 2025.
Gearing
There were no borrowings during the period. At 30 September 2022, there was net
cash of £0.2 million (30 September 2021: £1.7 million). The Company does not
currently use a loan facility but keeps its borrowing arrangements under
review. The Company may look to make use of borrowing arrangements when markets
are less volatile with the objective of increasing portfolio returns.
Dividends
The income generated by the portfolio has been severely impacted by the absence
of Russian dividends. This will affect the dividend that the Company can pay to
Shareholders in the near-term. However, the Investment Manager believes the
income potential of the portfolio will grow sustainably over the medium term,
in line with the earnings growth of the underlying companies in which we
invest.
In respect of the six-month period ended 31 March 2022, the Company paid an
interim dividend of 6 pence per share (2021: 15 pence per share). For the year
under review, the Board recommends a final dividend of 11 pence per share
(2021: 11 pence per share). As communicated in the half-yearly report, the
Board of Directors took a conscious decision to pay a lower interim dividend,
with a view to paying a higher proportion of the annual dividend via the final
dividend. Paying a greater amount of income via the final dividend allows the
Company increased certainty in managing the pay-out of dividend cashflow from
investee companies at a time when income projections are subject to
considerable volatility.
Promotional Activity and Keeping Shareholders Informed
The Board and Investment Manager have put in place an ongoing communications
programme that seeks to maintain the Company's profile and its investment
remit, particularly amongst retail investors. Over the review period, and
mindful that this has been a testing time for investors, we have focused
attention on our monthly BEMO News which is emailed to subscribers comprising
many hundreds of the Company's existing Shareholders, as well as other
supporters. These email updates provide relevant news and views plus
performance updates, which are particularly useful when markets are
challenging. If you have not already done so, I encourage you to sign up for
these targeted communications by visiting the Company's web page at
www.bemoplc.com and clicking on 'Register for email updates'. Alongside this,
we are continuing to refresh the Company's website with new themed content. We
have also been reviewing the layout of the site and resulting enhancements will
be rolled out over the coming months.
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, 26 January 2023 at 2.30pm. 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
Equity markets are likely to continue to be volatile over the coming months, as
investors pay attention to economic growth data and any signs that inflation
may be peaking, whilst central banks remain steadfast in raising rates, even as
the global economy slows. Whilst our investment region will undoubtedly be
impacted by these global trends, there are reasons to be positive.
High energy prices have significantly strengthened the fiscal backdrop across
Middle Eastern economies. Many of these countries are now forecast to
experience strong economic growth whilst at the same time benefitting from low
inflation, a combination that is extremely rare in the current climate.
Approximately 57% of the Company's portfolio is invested in the Middle East and
the Investment Manager continues to find many attractive opportunities across
this region.
Similarly, there are a number of exciting stock specific opportunities in South
Africa, particularly amongst companies with a role to play in the energy
transition as we move towards a greener planet. Inflationary pressures are less
severe in the region than in many other parts of the world, and the monetary
policy backdrop is stable.
The outlook in Eastern Europe is understandably less rosy, given the proximity
of the region to the ongoing conflict. At the time of writing, the portfolio is
underweight to this region relative to the benchmark. Stock market valuations
are largely reflecting a deterioration in investor sentiment, which, over the
medium term, may provide good opportunities for our Investment Manager.
These factors should help contribute to the increasing attractiveness of
emerging EMEA equities, whilst the Company's diversified portfolio is well
placed to continue to deliver attractive returns for our Shareholders.
These are tough times in which to be a fund manager and I should like to pay
tribute to the cool-headed professionalism with which the Barings team have
steered the portfolio over the year.
Frances Daley
Chairman
7 December 2022
Report of the Investment Manager
Our strategy seeks to diversify your portfolio by harnessing the long-term
growth and income potential of Emerging EMEA. The portfolio is managed by our
team of experienced investment professionals, with a repeatable process that
also integrates Environmental, Social and Governance ("ESG") criteria.
Our strategy
Access First-hand Expertise Process ESG Integration
Experienced investment The investment team Extensive primary Fully integrated
team helps to foster conducts hundreds of research and dynamic ESG assessment
strong relationships company meetings per proprietary combined with active
with the companies in year, building fundamental analysis, engagement to
which we invest. long-term evaluating companies positively influence
relationships and over a 5-year research ESG practices.
insight. horizon with macro
considerations
incorporated through
our Cost of Equity
approach.
A detailed description of the investment process, particularly the ESG approach
can be found below.
Market Summary
The year began with a sense of optimism, buoyed by hopes of rising global
growth and corporate profits, in anticipation of further relaxations of COVID
restrictions globally. This enthusiasm proved to be short lived as global
markets worldwide declined significantly in response to Russian President
Vladimir Putin's invasion of Ukraine. Investors also faced broader headwinds in
the form of persistently high inflation and fears of a slowing global economy
as major central banks look to tighten financial conditions.
Against an extremely volatile backdrop, the Company's NAV declined by -29.9%
and underperformed the benchmark, which fell by -20.1%. The portfolio's
holdings in Russia accounted for approximately 6.5% of relative
underperformance over the period.
Within this environment, commodity prices, and particularly oil and gas, rose
sharply following the invasion. This was a direct result of reduced access to
Russian and Ukrainian supplies and was further exacerbated by sanctions. This
elevation of energy costs has further increased inflationary pressures and has
contributed to the decisions by central banks to raise interest rates, even as
consumer and business confidence has weakened. In turn, many investors have
flocked to more traditional "safe haven" assets, including the US Dollar, with
the US Dollar index now trading at a 20-year high against a basket of major
currencies. This has pushed the value of a number of dollar pegged currencies
higher, whilst across Emerging Europe, currency depreciation against the dollar
has reflected the domestic inflation picture, and sensitivity to rising energy
costs.
More broadly, these developments have prompted a marked deterioration in
investor confidence and, as a result, share price volatility has increased
across equity markets globally. However, in contrast with this widespread loss
of confidence, rising oil and gas prices have supported companies whose share
prices and profitability are linked to these commodities. Consequently,
companies in the Energy sector outperformed significantly (excluding Russia).
The Company's exposure to energy exporters, such as Saudi Arabia, the United
Arab Emirates ("UAE") and Qatar generated positive returns for the Company. We
would highlight that these benefits derived less from direct investments in
energy companies than exposure to the resulting economies and the improved
spending power of their underlying consumers. Conversely, markets across
Eastern Europe underperformed by the largest margins, as investors increasingly
focused on energy security concerns, due to their proximity to the conflict in
Ukraine.
Elsewhere, a rising interest rate environment globally has served to tighten
financial conditions, offering mixed results. Markets have reacted not only to
the absolute increase in rates, but also to the speed of change. As a result,
discretionary spending orientated sectors have suffered, as the consumers felt
the effects of both higher inflation and borrowing costs, which has affected
spending habits. Financials, such as banks, have fared better as the margins
they charge on lending increases as rates rise, enhancing profitability.
Currency Returns (vs GBP returns, %) - 1 October 2021 to 30 September 2022
U.S. 20.6%
Dollar
United 20.6%
Arab
Emirates
Qatari 20.6%
Rial
Saudi 20.5%
Riyal
Kuwaiti 17.4%
Dinar
Czech 5.1%
Koruna
Euro 2.1%
South 0.4%
African
Rand
Egyptian -3.1%
Pound
Polish -3.2%
Zloty
Hungarian -13.3%
Forint
Turkish -42.0%
Lira
Source: Barings, Factset, MSCI, September 2022.
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.
Our inability to receive dividends from Russian holdings has led to the loss of
a number of large dividend payers, resulting in the prospect of a lower level
of dividend generation compared to levels seen in the past five years. In
addition, the current climate has led to companies holding higher levels of
cash, whilst also focusing on potential merger and acquisition opportunities.
Despite this, we are of the opinion that the underlying revenue generation
potential relative to present valuations within the region remains one of the
strongest globally.
This wealth of potential, should in our view, express itself via the revenue
growth of the portfolio over the medium term. Rising pay-out ratios, efficiency
gains, and an encouraging economic environment, most notably in the Middle
East, will all contribute positively. Importantly, we believe that the revenue
generated from our investments will be sustainable and growing, as it will be
delivered from our Growth at a Reasonable Price orientated portfolio.
Company, Benchmark Returns and Country Returns
1 October 2021 to 30 September 2022, in GBP
Company Share Price Total -29.1%
Return
Company NAV Total Return -29.9%
Benchmark -20.1%%
Qatar 36.2%
Kuwait 28.6%
U.A.E. 26.9%
Turkey 25.4%
Saudi Arabia 23.0%
Czechia 8.9%
South Africa -2.4%
Greece -9.6%
Egypt -14.0%
Poland -41.9%
Hungary -44.8%
Russia -100.0%
Source: Barings, Factset, MSCI, September 2022.
12M - Market Performance (GBP) - 1 October 2021 to 30 September 2022
Developed Markets -2.9%
Emerging Markets -13.2%
EM EMEA -20.1%
EM Europe -77.5%
EM Latin America 21.1%
EM Asia -14.9%
Source: Barings, Factset, MSCI, September 2022.
Macro Themes
In line with our bottom-up approach, our primary focus is to identify
attractive investment opportunities at the company
level for our Shareholders. Nevertheless, we remain vigilant and mindful of
broader macro effects within the region. This in turn helps to support the
contribution to performance from our company selection, accessing long-term
growth opportunities, while reducing the effects of declines in performance
from major macro dislocations.
Energy Security
Following the events in Ukraine, oil and gas prices have seen significant
volatility, with oil rising as high as $120 a barrel before falling back below
$100. This has served to push energy security up the agenda, most notably in
Europe, which received approximately 40% of its piped natural gas imports from
Russia prior to the conflict. This situation has created both areas of concern
and opportunity. Eastern European nations reliant on this energy supply are now
subject to price pressures in the near term, and face a supply enigma over the
medium term as global supply lines are redrawn. We believe this will lead to
governments meaningfully reducing their exposure to Russian energy, replacing
this supply via significant investment into renewable infrastructure.
Supplying the Green Revolution
Climate change and the need to transition toward a world less dependent on
fossil fuels remains one of the most critical issues of our time. While we
continue to see an increased demand for electric vehicles and the associated
charging infrastructure as the most tangible examples of shifting consumption
patterns, what is often overlooked are the commodities required to support this
move to a greener society. Furthermore, a lack of investment in supply has led
to growing imbalances within critical commodities such as copper, nickel,
platinum group metals (PGMs) and aluminium, all of which are projected to hit
supply deficits following declines in inventory levels. This is especially
relevant given the amount of steel required for an offshore wind farm, which is
roughly four to five times greater than that required by an onshore facility
with the same gigawatt generation capacity. Electric vehicles are another
example, requiring significantly more copper relative to a standard internal
combustion engine vehicle. We believe this creates a unique prospect for these
commodities, as the increase in investment is set not only to benefit the
volume of exports of these metals, but also sustain high prices as the world
wrestles with limited supply.
A renewed vigour and focus on renewable energy infrastructure offers a wealth
of benefits for global commodity producers. South Africa finds itself in a
unique position as an enabler of the energy transition via its access to a
broad range of key metals. Currently, the Company has investments in Anglo
American, which is an industry champion in the production of nickel, a key
input in the production of electric batteries, as well as other energy
transition metals such as copper. We also hold Impala Platinum, which supplies
platinum and palladium to carmakers globally to support the production of
catalytic converters, which help reduce poisonous emissions from vehicles,
whilst also acting as a key component within hydrogen power cells.
Middle East - Emergent Economies
Markets across the Middle East have been some of the strongest performers
globally this year, as they have benefitted both from high energy prices and
the continued reopening of their economies to the world. This has seen their
representation in major indices rise, whilst a burgeoning IPO market is
broadening the investment opportunity and deepening local capital markets. The
region also benefits from a strong fiscal outlook, low single digit inflation,
and a reform agenda, all of which should boost consumer confidence and increase
the appeal of its investment case. Furthermore, demand for their exports should
not only improve the spending power of its consumers, but also allow for
continued investment into infrastructure and diversification of their economies
away from oil, helping support long term stability.
Your Company's largest market Saudi Arabia, is centre stage of these
developments. Saudi's "Vision 2030" program, has set out an ambitious agenda to
reduce dependence on oil, and diversify its economy. This reform framework is
creating a number of exciting opportunities in the privatisation of state
assets, alongside a growing domestic base of entrepreneurial companies. More
specifically, government initiatives such as "Sakani", that offers subsidised
mortgages for first time buyers to own their first home, and the "Wafi"
off-plan sales and rent programme, have driven the demand for affordable homes
and have played a key role in facilitating home ownership for Saudi nationals.
This has opened unique opportunities within the banking sector for instance,
where mortgages have accelerated. The Company has examples of investments in
financials such as Al Rajhi Bank, which has seen extensive growth in interest
margins from rapidly rising property ownership in Saudi Arabia as its economy
diversifies, and Tawuniya, an insurer well placed to benefit from the growing
health insurance market.
Company Selection
Our team regularly engages with management teams and analyses industry
competitors to gain an insight into a company's business model and sustainable
competitive advantages. Based on this analysis, we seek to take advantage of
these perceived inefficiencies through our in-depth fundamental research, which
includes an integrated Environmental, Social and Governance (ESG) assessment,
and active engagement, to identify and unlock mispriced growth opportunities
for our Shareholders.
Across the Middle East, we have found a number of companies, most notably
within financials, which offer attractive
fundamentals operating in economies benefitting from higher energy prices and
lower inflation. In the UAE, real estate
company Emaar Properties contributed significantly to relative performance
following consistently solid earnings, and an increase in profit margins, which
have been supported by the easing of COVID restrictions and a resumption of
economic activity. Elsewhere across the region, Qatar National Bank performed
well, with quarterly results pointing to a significant increase in net interest
margins.
Portfolio Country Weight (%)
Saudi Arabia 33.5%
South Africa 27.4%
U.A.E. 11.0%
Qatar 9.2%
Poland 5.4%
Hungary 3.6%
Turkey 3.1%
Kuwait 3.1%
Greece 2.1%
Czechia 1.5%
Source: Barings. September 2022.
Portfolio Sector Weight (%)
Financials 50.9%
Materials 15.0%
Comm. Services 9.9%
Consumer Disc. 8.2%
Real Estate 4.8%
Industrials 4.2%
Consumer Staples 3.6%
Energy 2.2%
Information 0.9%
Technology
Utilities 0.2%
Source: Barings. September 2022.
In Saudi Arabia, not owning Saudi Aramco negatively impacted relative
performance as the shares outperformed against a backdrop of stubbornly high
oil prices. However, we continue to prefer other compelling investment
opportunities in the country, most notably within the banking sector, where
mortgage issuances have accelerated. Examples of company specific opportunities
include our investments in banks Al Rajhi and Saudi National Bank, which have
some of the highest market shares of mortgage loans in the sector, accounting
for more than 50% combined. We are also invested in local exchange Tadawul,
which is benefitting from the broadening and deepening of the country's capital
markets as well as increased participation of international investors, whilst
diversification into other asset classes has also provided further growth
potential.
Across South Africa, performance was mixed in light of an often-volatile
commodity, currency and macro environment. Diversified miner Anglo American was
one such example, with the company's share price experiencing both a period of
protracted appreciation as commodity prices rose, and then a period of
depreciation as a weakening economic environment dragged near-term commodity
price outlooks lower. Despite volatility in the share price, we continue to
believe over the medium term the company will benefit from being a major
producer of platinum which, in our view, has a significant role to play in the
energy transition via its use in hydrogen-powered fuel cell electric vehicles,
as well as in the production of green hydrogen via electrolysis. Similarly,
telecoms group MTN was one of the stronger performers earlier in the year,
boasting a consumer base who rely almost exclusively on mobile devices, backed
by solid growth in voice, data and fintech services. However, in the near term,
the share price has given back some gains as investors weighed macro concerns
in some of the company's bigger markets, such as Nigeria and Ghana, alongside
currency weakness. Multinational technology investor Naspers also detracted
from relative performance, as its largest holding Tencent was impacted by
broader weakness across the technology sector and uncertainty regarding the
outlook for the Chinese economy. Despite the headwinds, we believe the
regulatory risk surrounding the Chinese technology sector may have peaked. This
can be seen in renewed game approvals by the local regulator, a key component
of growth within Tencent's business.
Stock selection opportunities across Emerging Europe remained challenging in
light of the reduction of gas supplies to Europe, and the associated energy
price inflation. In Hungary, equity markets moved lower in response to broad
based tax and tariff increases designed to fund the country's increasingly
burdensome social transfers. This included windfall taxes on the banking sector
which negatively impacted our investment in OTP. Similarly in Poland, insurance
group PZU and bank PKO were weak as a result of headwinds facing the Polish
banking sector in light of government imposed populist measures, including a
windfall tax on the sector more broadly, alongside a one-year moratorium on
mortgage payments.
Holdings in Turkey detracted over the period, led by online shopping platform
Hepsiburada as the company reported earnings that fell short of market
expectations. Whilst the local inflationary picture has been challenging for
Turkish corporates, we expect the company to benefit from the underpenetrated
Turkish ecommerce market. There were however pockets of good stock selection,
with local conglomerate Koc's diversified asset base and exposure to a number
of export businesses driving solid earnings, and offering some resilience
amidst a tougher economic backdrop. In Greece, our investment in National Bank
of Greece was a significant contributor to returns, as the company produced
strong core operating profits alongside cost reductions. Whilst historically
the Greek banking sector has faced challenges, National Bank of Greece now
operates with a strong capital base and a level of non-performing loans (NPL's)
comparable to banks in developed Europe.
Exposure to Russian securities accounted for a significant amount of
underperformance over the period, as Russia's invasion of Ukraine created
considerable market volatility and led to exchange closures and sanctions. As
already mentioned, this resulted in the Company valuing all Russian assets at
zero as of the 2nd March. As a result, our positions in internet company
Yandex, supermarket retailers Magnit and X5, financials Sberbank and TCS, and
energy and materials exposures Lukoil and Norilsk Nickel were amongst the
portfolio's most significant detractors to performance over the period.
Engagement Case Study: Impala Platinum
Impala Platinum is one of the many companies we have actively engaged with over
the period.
Overview: · We engaged with Impala Platinum, one of the largest PGM miners in
South Africa, to better understand its aspiration to decarbonise its
operations by 2030 and meet net-zero targets by 2050, while emphasising the
need to align management incentives to those targets.
Objective: · Our aim was to encourage the company to improve the disclosure of its
decarbonisation goals, whilst articulating medium and long-term ambitions
and targets, in areas we believe are increasingly important to investors but
were missing from the company's reporting and announcements.
Outcome: · Through our interactions, we have seen improvements in the company's
attitudes towards their net-zero and decarbonisation commitments.
· Furthermore, the company has confirmed that it has made a commitment
to achieve carbon neutrality by 2050 and is finalising interim goals. These
interim targets, awaiting approval, are likely to require a 30% reduction in
total CO2 emissions relative to a 2019 baseline.
· In addition, the company has guided that once the interim
decarbonisation plans are approved, these will be considered for
incorporation into management performance and incentive payments scorecards.
· While this is a welcome update, we will continue to monitor this
decarbonisation roadmap to ensure the company is meeting its commitments.
Outlook
In the short term, markets are likely to remain uncertain as investors closely
monitor developments in Ukraine, inflation, and the broader global economic
outlook. Looking ahead however, we believe there are a number of compelling
opportunities across the emerging markets of Europe, the Middle East and Africa
(EMEA).
Markets across the Middle East have been some of the strongest performers
globally this year as they have benefitted both from high energy prices, and
the continued opening up of their economies. This has seen their representation
in major indices rise, whilst a burgeoning IPO market is broadening the
investment opportunity. Interestingly, Middle Eastern markets remain
significantly underrepresented within investor portfolios, which - in
combination with the economic and structural tailwinds mentioned above - help
increase demand across the region's equity markets. The region also benefits
from a strong fiscal outlook, low single digit inflation, and a reform agenda,
all of which should boost consumer confidence and increase the appeal of the
investment case.
South Africa presents another interesting investment opportunity across the
EMEA region, primarily because of its access to a broad range of metals. High
commodity prices have helped push the current account balance into surplus, and
corporate investment has rebounded significantly. This should help provide
broader opportunities to invest, as real earnings growth (excluding resources)
is still below pre-COVID levels, which suggests there is catch up potential.
Whilst we remain vigilant about the potential for social unrest, ongoing
structural reforms by the government are encouraging and are likely to support
rising private investment and higher employment levels.
Finally, whilst markets across emerging Europe remain most exposed to the war
in Ukraine, looking further ahead, we believe opportunities exist as the region
pivots away from Russian gas. This is supported by large EU infrastructure
projects, such as the European Green Deal and NextGen EU funds that are set to
bring billions of euros to EU member states to help transform their energy
systems. There is also an opportunity for the region to take advantage of
nearshoring trends, where companies are bringing manufacturing closer to
customers. Certain EU member states are well placed to provide lower cost
skilled labour, strong regulatory protection, and crucially, a lower delivery
time for the
end consumer due to their closer geographical proximity.
We will continue our process of building new or adding to existing positions in
companies with strong and sustainable
business franchises, positive ESG dynamics, and where our proprietary bottom-up
research has identified a significant degree of undervaluation relative to
their future growth potential.
Investment Process Highlights
We believe that equity markets are inefficient and that consistently applied
fundamental bottom-up company analysis can identify mispriced opportunities. To
unearth these opportunities, we follow a Growth At a Reasonable Price ("GARP")
approach, and apply this to all companies across our region. GARP investing is
focused on identifying companies that are positioned to grow sustainably over
the medium to long term, but where growth is not necessarily recognised by the
market. We therefore seek to select companies that have the potential to
thrive, but also offer good value. We believe that this approach is the most
effective way to invest over longer periods as it focuses on company
fundamentals, sustainable business franchises, strong balance sheets and
improving ESG characteristics.
Research
For company research, we use a consistent, analytical and qualitative framework
applied through our proprietary Company Scorecard (see chart A). This focuses
on three pillars consistent with our GARP methodology: Growth, Valuation and
Quality. Key inputs to our research analysis include regular interactions with
company management teams, detailed review of financial statements, and other
primary information resources (e.g. competitors, customers, industry experts,
regulators). This information is utilised by our investment professionals to
produce proprietary financial models over a five-year research horizon. We
value companies using our 5-year earnings forecasts discounted by an
appropriate Cost of Equity (CoE). By applying a consistent research approach,
we can evaluate each company on a like-for-like basis and determine relative
attractiveness across countries and sectors.
Chart A - Fundamental Research: Consistent Company Scorecard
Fundamental Research
Company Meetings Sector / Industry / Macro Dynamics
5 Year Proprietary Financial Forecasts ESG Considerations
Growth Quality Valuation
Historical - How has the Franchise - Does the company Barings Valuation Approach -
company grown its earnings have a competitive advantage? We use our 5-year earnings
over the last 3-years? forecasts, discounted by our
Cost of Equity, to set price
Near-term - Is the company Management - Are they targets and determine upside
expected to grow earnings competent, committed and
over the next 12-months? aligned with shareholders?
Long-term - How is the Balance Sheet - Does the
company set to grow earnings company have the ability to
over the next 5-years based fund its growth?
on our forecasts?
Portfolio construction
We take the ideas generated through our research process and construct a
portfolio that targets sustainable investment returns. Risk management is
central to this process, and we employ a range of approaches to identify risks
within the portfolio. The aim of this process is to ensure the businesses in
which we invest drive portfolio performance, rather than broader macroeconomic
events.
Once invested, our experienced investment team continue to monitor each company
to ensure that our conviction remains intact and that an investment remains
attractive relative to other opportunities available in the market.
Our 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.
Integrating ESG
As an integral step of our research, our ESG assessment affects both our view
of a company's quality and its valuation. This assessment is dynamic rather
than static; we closely monitor the companies we invest in for improvements or
deteriorations in their attitudes to ESG and reflect this in our scoring of
both the quality of the business and its valuation. For each company under our
coverage we complete an ESG scorecard that focuses on three categories as a
foundation of our assessment:
. Sustainability of the Business Model (Franchise)
. Corporate Governance Credibility (Management)
. Hidden Risks on the Balance Sheet (Balance Sheet)
Within each of these categories, we identify three further subcategories, which
are relevant areas of potential risk or opportunity (see Chart B below).
Chart B - Fundamental Research: Example ESG Assessment
Key Topics Score/Rationale Data / Issues to Consider
1 Employee Exemplary Employee Relations: Staff Turnover;
Sustainability Satisfaction Strikes; Remuneration of Staff;
of the Fair Wages; Injuries; Fatalities;
Business Model Unionised Workforce; Employee
(Franchise) Engagement, Diversity & Inclusion
2 Resource Intensity Improving Water Usage; GHG Emissions; Energy
; Transition Risks
3 Traceability/ Improving Traceability of Key Inputs;
Security in Supply Investments in Protecting the
Chain Business From External Threats,
e.g. Cyber Security; Backward
Integration (Protection of Key
Inputs); Transition Risks in Supply
Chain
4 Effectiveness of Not Improving Sound Management Structures:
Supervisory/ Separation of Chair & CEO; Size of
Corporate Management Board Board; Independence of Board;
Governance Frequency of Meetings; Attendance
Credibility Record; Voting Structure; Female
(Management) Participation on Boards.
5 Credibility of Not Improving Credible Auditor; Independent Audit
Auditing Committee; Qualification to
Arrangements Accounts
6 Transparency & Exemplary Access To Management; Financial
Accountability of Reporting; Tax Disclosure and
Management Compliance; Appropriate Incentive
Structure; Remuneration of Staff;
Gender & Diversity Considerations;
Employee Relations
7 Environmental Improving GHG Emissions; Carbon Intensity;
Hidden Risks Footprint History of Environmental Fines/
on the Balance Sanctions; Reduction Programmes in
Sheet (Balance Place for Water/ Waste/Resource
Sheet) Intensity, Air Quality; Transition
Risks; Physicals Risks from Climate
Change
8 Societal Impact of Exemplary Health/Wellness Implications of
Products/Services Consumption of goods/ services;
Product Safety Issues; Community
Engagement
9 Business Ethics Improving Anti-competitive practices; Bribery
/Corruption; Whistle-Blower Policy;
Litigation Risk; Tax Compliance;
Freedom of Speech; Anti-Slavery and
Human Rights; Gender & Diversity
Considerations
ESG and its impact on the company valuation
Each of the nine subcategories of our ESG assessment as set out below will be
rated from Unfavorable to Exemplary:
UNFAVORABLE NOT IMPROVING IMPROVING EXEMPLARY
+2% to COE -1% to COE
The individual scoring of each of the nine subcategories will translate into a
premium or a discount that is added to the company's Barings Cost of Equity
("COE"), which is used to discount our earnings forecasts. A low ESG score
would translate into an addition to the discount rate of up to 2 percent, thus
penalising the stock and reducing its attractiveness by decreasing its
valuation. The rationale is that a company associated with poor ESG is likely
to have higher risks that should be reflected in the discount rate. Conversely,
a high ESG score can indicate a company that is lower risk, resulting in a
reduction to the COE of up to 1 percent.
Active Engagements with Investee Companies
We undertake engagements to positively influence ESG practices and improve ESG
disclosure. Our approach is based on clear objective setting, which strengthens
our ability to monitor and steer company progress. We also collaborate with
peers and industry groups to enhance and share best practices. We believe that
by engaging with companies, rather than blanket exclusions of entire sectors,
we have a greater chance of successfully effecting change. This can also result
in value creation for our Shareholders.
Voting
We undertake to exercise our voting rights whenever possible, and have engaged
a dedicated third-party proxy-voting provider. In instances where we disagree
with the provider's recommendations, we have the ability to cast our votes
differently.
Climate Change
There is a clear trend towards a lower carbon economy leading to decreased use
of fossil fuels in an effort to combat climate change. We incorporate
transition risks as well as physical risks from climate change in our valuation
and qualitative evaluation of companies, and use external data to run climate
change scenarios. We couple this with our knowledge of companies to identify
potential risks from climate change and where needed, will engage with
companies to improve disclosure or change behavior.
In addition, we have recently enhanced our ESG process by introducing a Carbon
Cost assessment for relevant companies within the investment universe. One
component of the solution to climate change is the reduction of greenhouse gas
(GHG) emissions. To encourage this, governments have proposed or implemented
policy tools, such as carbon taxes. For high carbon-emitting companies, these
policy tools will likely become a significant cost burden in the years ahead
and could impact companies' profitability.
Our Carbon Cost assessments aims to ensure that we quantify these potential
costs through an adjustment to the Cost of Equity to more accurately value
companies and enhance our decision making. We assess the decarbonisation
commitments of relevant companies based on six key areas (see Chart C). The
individual scoring of each of these areas will translate into a Cost of Equity
adjustment from 0% to 2%:
UNFAVORABLE NOT IMPROVING IMPROVING EXEMPLARY
+2% to COE 0% to COE
Chart C - Fundamental Research: Carbon Cost Assessment
Score Data / Issues to Consider
Exemplary Does the company have a 'net zero' carbon target in
line with national targets in the jurisdiction where
Decarbonisation the company operates?
Commitments
Improving Are intermediate targets clearly communicated over a
5 and 10-year horizon?
Improving Are tangible projects in place related to climate
change mitigation with current and proven
technology?
Not Improving Are management incentives aligned with carbon
reduction targets?
Improving Have these targets been certified by an outside
organisation?
Exemplary To what extent does the company use offsets?
We believe that this adjustment provides a crucial starting point for
understanding how carbon costs will affect companies - particularly until there
is more comprehensive data disclosed related to GHG emissions costs and
decarbonisation efforts. As disclosures improve going forward, we see a path
toward these costs being explicitly modelled in financial forecasts, with
companies incurring a cost of carbon in their profit and loss statements just
as they would any other cost of doing business.
For further detail on our approach to ESG integration and our Carbon Cost
assessment please see the links in the full Annual Report and Accounts for the
year ended 30 September 2022.
Baring Asset Management Limited
Investment Manager
7 December 2022
Detailed Information
Barings Emerging EMEA Opportunities PLC's annual report and accounts for the
year ended 30 September 2022 is available at https://www.barings.com/en-gb/
investment-trust/the-trust/financial-statements and will be available today,
along with the notice of meeting for the Company's AGM on https://
www.barings.com/en-gb/investment-trust/the-trust/corporate-documents.
It has also been submitted in full unedited text to the Financial Conduct
Authority's National Storage Mechanism and is available for inspection at
data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A)
of the Financial Conduct Authority's Disclosure Guidance and Transparency
Rules.
For any enquiries please contact:
Quill PR +44 (0)20 7466 5050
Nick Croysdill, Andreea Caraveteanu
About Barings Emerging EMEA Opportunities PLC
"Finding quality companies from Emerging Europe, the Middle East and Africa."
Barings Emerging EMEA Opportunities PLC (the "Company") is a UK based
investment trust that was launched on 18 December 2002 and is managed by Baring
Fund Managers Limited.
In November 2020, the Company broadened its investment policy to focus on
growth and income from quality companies in the Emerging Europe, Middle East
and Africa ("EMEA") region. It also changed its name from Baring Emerging
Europe PLC to Barings Emerging EMEA Opportunities PLC at the same time.
For more information, and to sign up for regular updates, please visit the
Company's website: www.bemoplc.com
LEI: 213800HLE2UOSVAP2Y69
ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the website (or any website) is incorporated
into, or forms part of, this announcement.
END
(END) Dow Jones Newswires
December 08, 2022 02:00 ET (07:00 GMT)
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