Barings Emerging EMEA Opportunities Plc - Half-year Report
Half Year Report
for the six months ended
The Directors present the Half-Year Financial Report of the Company for the period to
Financial Highlights
for the six-month period to
KEY PERFORMANCE INDICATORS
NAV total return1# Share price total return1# Dividend per Ordinary Share1# 13.2% 12.8% 6.0p (31 March 2023: -2.1%) (31 March 2023: -5.0%) (31 March 2023: 6.0p)
31 March 2024 31 March 2023 30 September 2023 NAV per Ordinary Share1 682.1p 607.8p 617.6p Share price 532.5p 509.0p 483.0p Share price total return1,*,# 12.8% -5.0% -8.8% Discount to NAV per Ordinary 21.9% 16.3% 21.8% Share1 Benchmark1,* 5.8% -5.5% -3.4% Dividend yield1,2,3 3.2% 3.3% 3.5% Ongoing charges1 1.8% 1.6% 1.6%
RETURN PER ORDINARY SHARE
________________________________________________________________________________ | |31 March 2024 |31 March 2023 |30 September 2023 | |________|______________________|_________________________|______________________| | |Revenue|Capital|Total |Revenue|Capital |Total |Revenue|Capital |Total| |________|_______|_______|______|_______|________|________|_______|________|_____| |Return | | | | | | | | | | |per |5.54p |69.89p |75.43p|6.71p |(20.78)p|(14.07)p|14.59p |(13.16)p|1.43p| |Ordinary| | | | | | | | | | |Share | | | | | | | | | | |________|_______|_______|______|_______|________|________|_______|________|_____|
Revenue return (earnings) per Ordinary Share is based on the revenue return of £653,000 (
As at
1 Alternative Performance Measures (“APMs”) definitions can be found in the Glossary as set out in the full report.
2 The yield as of
3 The yield as of
* Movement to 31 March relates to the preceding six months and movement to 30 September relates to the preceding twelve months.
# Key Performance Indicator.
Chairman’s Statement
Performance
After the turmoil of the past two years, it is a pleasure to be able to report positive results for the six months to
Against this backdrop, we are pleased to report a significant gain in the Company’s Net Asset Value (“NAV”), which registered a total return of 13.2%, outperforming the benchmark, and broader emerging markets.
The Board are encouraged that performance continues to improve post the write-down of Russian assets, with the portfolio ahead of the benchmark over six months, one year and two years. Regrettably, performance over three and five years continues to be impacted by the negative relative performance in the 2022 financial year, with the Company lagging the benchmark across both periods. However, the returns remained ahead of the benchmark over seven and ten years.
Investment Portfolio
The strong performance within the portfolio serves to highlight the distinctive opportunities which the universe of EM EMEA has to offer.
Emerging
The performance of markets in the
Whilst absolute returns in
Russian assets in the portfolio continue to be valued at zero whilst extensive sanctions and restrictions on the sale of securities remain in place. The Board, however, remains focused on how shareholder value can be best preserved, created and realised in relation to the holdings of Russian assets. A welcome development over the period was the ability of the Investment Manager to take advantage of opportunities to exit three companies, namely Magnit, X5 and TCS, thereby releasing approximately £2.3m of value back into the Company. While these are positive developments, the Board will continue to value the remaining assets at zero until circumstances permit otherwise. Consequently, there is no exposure to
Discount Management
The discount at
The Board remains focused on discount management, with the aim of containing the discount. However, whilst share buybacks continue to be an option available to the Company to help manage the discount, they are significantly less effective during periods of elevated market volatility, as has been the case recently. As a result, the Company has not bought back any shares during this financial period.
Gearing
There were no borrowings during the period. At
Interim Dividend
In the first half of the financial year, the portfolio generated an income return of
Based on dividends paid over the prior 12 months and the share price as at
Outlook
Looking ahead, global equity markets are likely to continue to be driven by news flows surrounding the potential decline of inflation and a loosening of monetary policy by US and western central banks. Although the oil price rebound in recent months may limit central banks' scope to reduce interest rates, equity markets should continue to benefit from broadly robust and uninterrupted growth, allaying widespread concern that monetary policy designed to bring down inflation might also lead to stagnation or even recession.
While the global outlook remains uncertain, we are beginning to see an increasingly constructive view within emerging markets, as the monetary policy tightening cycle turns ahead of developed markets. Meanwhile the absolute valuation of EM equities, and the relative valuation versus developed equities, appears attractive, suggesting investor expectations for the asset class remain overly depressed. This creates the potential for increasing interest in the asset class in general and EMEA markets in particular.
In this connection, we already see an improving economic picture across a number of countries in the portfolio. Within Emerging Europe, financials continue to represent a significant portion of the portfolio, and the Investment Manager is positive on the prospects for the sector. In addition, Emerging Europe is also buoyed by strong growth in real household income, which has reached its highest level relative to developed
Turning to the
Director appointment
The Board was delighted to welcome
Promotional activity and keeping shareholders informed
The Board and Investment Manager have in place an ongoing communications programme that seeks to maintain the Company’s profile and its investment remit, particularly amongst retail investors. Over the review period we have continued to distribute our monthly
Chairman
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 Process Access Extensive primary ESG Integration First-hand research and Experienced Expertise proprietary Fully integrated investment team fundamental dynamic ESG helps to foster The investment team analysis, evaluating assessment combined strong conducts hundreds companies relationships with of company meetings with active the per year, building over a 5-year engagement to long term research horizon positively influence companies in which relationships and with macro insight. considerations ESG practices. we invest. incorporated through our Cost of Equity approach.
A detailed description of the investment process, particularly the ESG approach can be found on pages 18 to 19 of the Annual Report and Accounts for the year ended
Market Summary ( All numbers quoted in GBP )
Over the period EMEA equities were stronger, along with most equity markets globally. Markets rose in anticipation that the US Federal Reserve would cut interest rates in 2024, earlier than previously expected. A combination of falling inflation and weaker economic data reinforced the belief that policymakers had passed the peak of the tightening cycle, prompting a rally in risk assets, notably in the latter stages of Q4 2023. Against this backdrop, the Company’s NAV increased by 13.2%, significantly outperforming the MSCI EM EMEA benchmark which rose by 5.8%.
Emerging
Markets within Emerging Europe were some of the best performers over the period, continuing the trend of outperformance during 2023.
South African equities ended the period largely flat, returning 1.4%, reflecting the ongoing electricity supply crisis which plagued the economy in 2023. We are, however, seeing tentative signs of improvements, allowing for a more constructive outlook for domestic consumption to rebound and support the economy.
The performance of markets in the
EMEA Market Performance (in GBP, based on MSCI indices)
Currency Returns (local currency returns vs. GBP)
Country Returns Currency Returns Poland 38.0% Poland 5.9% Greece 16.3% Greece -1.4% Hungary 13.5% Hungary -2.5% Saudi Arabia 10.1% Saudi Arabia -3.4% Kuwait 4.4% Kuwait -2.9% South Africa 1.4% South Africa -3.4% Qatar -2.5% Qatar -3.4% Turkey -2.9% Turkey -18.1% U.A.E -6.1% U.A.E -3.3% Czechia -6.8% Czechia -4.9% Egypt -16.8% Egypt -37.0%
Source: Barings, Factset, MSCI,
Eastern European markets were some of the strongest performers in absolute terms, whilst markets such as
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.
Whilst dividend inflows to the portfolio remain below historical averages, due to the exclusion of
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.
The ongoing violence in the
One of the standout performers of Q1 2024 was Istanbul’s stock market, boosted by Turkey’s efforts to anchor inflation expectations and build trust among market participants. A significant increase in international investment inflows followed confirmation from the new governor of the
Following the period end, Turkey’s nationwide municipal elections resulted in a resounding opposition gain against President Erdoğan’s AKP party, with voters focusing on inflation as a critical issue. We believe this result is a positive development for the market, with voters sending a clear message to Erdoğan that the key focus should be to support Turkey’s finance team, led by
The benefits of bottom-up stock selection continued to pay dividends in
2023 saw
The problems have, however, begun to show signs of easing and served to focus attention on the failings of the ruling
With inflationary effects abating over the course of 2023, Central European real household income growth started to gather momentum, driven by a powerful mix of foreign direct investment, tight labour markets, productivity gains and a strong export sector. This has left the region’s household income growth rates at an unparalleled level in a European context. Against this backdrop, we see discretionary consumption and residential real estate as key areas which stand to benefit from the resurgent buying power of Central European consumers.
Whilst historically
While the Company has taken the decision to value its Russian assets to zero following the invasion of
Portfolio Portfolio Sector Weight Country Weight Saudi Arabia 31% Financials 48% South Africa 26% Materials 15% U.A.E. 10% Communication Services 10% Qatar 6% Consumer Discretionary 11% Poland 8% Real Estate 4% Hungary 4% Industrials 5% Turkey 4% Consumer Staples 3% Kuwait 5% Energy 3% Greece 4% Information Technology 1% Czechia 2%
Source: Barings, Factset, MSCI,
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.
Stock selection significantly improved the portfolio’s relative return over the period, whilst sector asset allocation had a small negative impact.
The contribution from financials was the largest contributor from a sector perspective and was supported from a number of different regions within EM EMEA. We are pleased to report that our top five investments in this sector contributed 75% of the portfolio’s outperformance relative to the comparator benchmark over the last six months. This reflects our focus on stock selection from a broad universe of 57 financial companies.
In Emerging Europe, PKO Bank Polski, Poland’s largest bank, was the standout performer, as the bank benefited from the improving political landscape following the results of the country’s general election. In
Our underweight position in resources, materials and energy, also contributed positively, as a number of unowned companies across the region saw a deteriorating earnings outlook. In
Despite reducing our underweight in health care, the sector had a negative impact on relative performance following the strong performance of a small number of benchmark holdings. To date, we have invested in the Saudi private hospital operator
In light of the strong market rally, the portfolio’s small allocation to cash ended the period as the largest detractor to relative performance.
Engagement Case Study
Impala Platinum
We regularly engage with companies with the aim of improving corporate behaviour or enhancing disclosure levels.
We engaged with Impala Platinum, a South African mining company, to Overview: understand its response to an elevator accident which led to fatalities in one of its mine shafts. Our aim was to understand the safety response of Impala Platinum, Objective: including the immediate impact on families, the breadth of its investigations and plans for improvement. Following reports of the accident, we contacted the company to request they answer a range of questions. The company was prompt to respond, confirming that the impacted shaft remains closed, subject Outcome: to required repairs and securing approval from the regulator to re-open. In addition, the remaining shafts were all proactively stopped by the company and subsequently re-opened with full support from the regulator. A formal investigation by the regulator followed by an inquiry into the incident/findings has commenced (normal time to conclusion 6-24 months). This will be accompanied by multiple independent and coordinated investigations – a formal investigation and inquiry process overseen by the regulator – internal and independent expert investigations commissioned by the company and overseen by the board. Based on this response, we believe the company has evidenced a robust response, and we have encouraged the company to make this information public and will continue to monitor for improvement
Outlook
The diversity of the three dominant regions within Emerging Europe,
Whilst the political landscape in the
Within emerging
Investment Manager
Detailed Information
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LEI: 213800HLE2UOSVAP2Y69