Barings Emerging EMEA Opportunities Plc - Annual Financial Report
PR Newswire
London, December 6
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
Annualised NAV total return1,# | Share price total return1,# | Dividend per Ordinary 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 Share1 | 13.3% | 13.9% | - |
| 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 Ordinary Share0 | 16.77p | (289.37)p | (272.60)p | 23.86p | 225.16p | 249.02p |
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.
1AlternativePerformanceMeasures ("APMs") definitions can be found in the Glossarybelow.
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 Share | 632.1p | 920.7p | 694.7p | 930.8p | 824.8p |
| 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 Return | -10.5 | -3.0 |
| 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 Return | -4.0 | 24.3 | -27.5 | 39.7 | -29.1 |
| 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.
1As 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 team helps to foster strong relationships with the companies in which we invest. | The investment team conducts hundreds of company meetings per year, building long-term relationships and insight. | Extensive primary research and proprietary fundamental analysis, evaluating companies over a 5-year research horizon with macro considerations incorporated through our Cost of Equity approach. | Fully integrated dynamic ESG assessment combined with active engagement to positively influence ESG practices. |
A detailed description of the investment process, particularly the ESG approach can be found 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. Dollar | 20.6% |
| United Arab Emirates | 20.6% |
| Qatari Rial | 20.6% |
| Saudi Riyal | 20.5% |
| Kuwaiti Dinar | 17.4% |
| Czech Koruna | 5.1% |
| Euro | 2.1% |
| South African Rand | 0.4% |
| Egyptian Pound | -3.1% |
| Polish Zloty | -3.2% |
| Hungarian Forint | -13.3% |
| Turkish Lira | -42.0% |
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 Return | -29.1% |
| 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.
EnergySecurity
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.
PortfolioCountry 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.
PortfolioSector 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 Technology | 0.9% |
| 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 company grown its earnings over the last 3-years? | Franchise - Does the company have a competitive advantage? | Barings Valuation Approach - We use our 5-year earnings forecasts, discounted by our Cost of Equity, to set price targets and determine upside |
| Near-term - Is the company expected to grow earnings over the next 12-months? | Management - Are they competent, committed and aligned with shareholders? | |
| Long-term - How is the company set to grow earnings over the next 5-years based on our forecasts? | Balance Sheet - Does the company have the ability to fund its growth? |
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.
OurFocus 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 | ||
Sustainability of the Business Model (Franchise) | 1 | Employee Satisfaction | Exemplary | Employee Relations: Staff Turnover; Strikes; Remuneration of Staff; Fair Wages; Injuries; Fatalities; Unionised Workforce; Employee Engagement, Diversity & Inclusion |
| 2 | Resource Intensity | Improving | Water Usage; GHG Emissions; Energy; Transition Risks | |
| 3 | Traceability/Security in Supply Chain | Improving | Traceability of Key Inputs; Investments in Protecting the Business From External Threats, e.g. Cyber Security; Backward Integration (Protection of Key Inputs); Transition Risks in Supply Chain | |
Corporate Governance Credibility (Management) | 4 | Effectiveness of Supervisory/ Management Board | Not Improving | Sound Management Structures: Separation of Chair & CEO; Size of Board; Independence of Board; Frequency of Meetings; Attendance Record; Voting Structure; Female Participation on Boards. |
| 5 | Credibility of Auditing Arrangements | Not Improving | Credible Auditor; Independent Audit Committee; Qualification to Accounts | |
| 6 | Transparency & Accountability of Management | Exemplary | Access To Management; Financial Reporting; Tax Disclosure and Compliance; Appropriate Incentive Structure; Remuneration of Staff; Gender & Diversity Considerations; Employee Relations | |
Hidden Risks on the Balance Sheet (Balance Sheet) | 7 | Environmental Footprint | Improving | GHG Emissions; Carbon Intensity; History of Environmental Fines/Sanctions; Reduction Programmes in Place for Water/ Waste/Resource Intensity, Air Quality; Transition Risks; Physicals Risks from Climate Change |
| 8 | Societal Impact of Products/Services | Exemplary | Health/Wellness Implications of 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 | |
Decarbonisation Commitments | Exemplary | Does the company have a 'net zero' carbon target in line with national targets in the jurisdiction where the company operates? |
| 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.
