Barings Emerging EMEA Opportunities 16 May 2024

Barings Emerging EMEA Opportunities (BEMO) is the largest investment trust focussed on the diverse and uncorrelated EMEA universe . These countries figure only lightly in the broad emerging market indices and funds, yet have high growth potential with idiosyncratic drivers that could improve risk-adjusted returns on many portfolios.

Managers Matthias Siller and Adnan El-Araby have built a portfolio which maintains a large exposure towards the Gulf countries of Saudi Arabia, the UAE, Qatar, and Kuwait. The region is undergoing an exciting economic revolution as its rulers seek to prepare their countries for a global reduction in demand for fossil fuels, using their vast sovereign wealth to invest in education and infrastructure and foster the development of other sectors and industries. Other key themes in the Portfolio include the recovery story in Turkey, which has seen its markets soar in early 2024, and the growth of manufacturing in Eastern Europe as companies “near-shore” operations.

BEMO has delivered a strong year of Performance, with contributions coming from stock picks in Turkey, Saudi Arabia, and among Eastern European banks. Matthias and Adnan aim to offer broad exposure to the varied growth drivers in the region whilst adding alpha through stock selection rather than major macro calls. Performance was also helped by the trust managing to realise value in three of its Russian holdings, which had been written down to zero in the NAV after the imposition of sanctions. The remaining holdings bring major upside potential but no further downside.

BEMO’s shares trade at a 22% discount at the time of writing. Yet there is a performance-related tender offer due at the end of 2025, and the board have said they will consider all options in the interim, raising the possibility of the value in the discount being realised.

The historical yield of 3.1% means the trust offers diversification potential to income investors as well as growth investors.

The trust’s website address is www.bemoplc.com and investors can receive updates directly from the manager by signing up at www.bemoplc.com/preferencecentre.

After a strong year for developed market equities, thoughts are likely turning to consider where is next. BEMO offers exposure to a number of growth trends which are not directly correlated to US interest rates, developed world inflation, or China’s GDP growth, the key factors driving markets over the past year, and as such we think offers an interesting diversification opportunity. As the West decouples from China economically, many of the countries in the EMEA universe are beneficiaries, including the Eastern European countries which are seeing rising international investment. Meanwhile, Saudi Arabia and the Gulf states are undergoing radical economic reform, a non-cyclical trend which should see investment and economic activity grow in certain areas irrespective of global GDP growth. These are just two of the uncorrelated growth drivers which we think could deliver attractive returns over the medium term.

These countries are not without risk, of course, and political instability in Turkey, the Middle East, and South Africa all have to be borne in mind. However, BEMO’s shares trade at a wide discount of 22% to NAV. On top of this, the team estimate there is a further discount of c. 20% in the declared NAV when considering the Russian holdings, should they become saleable once more. A tender offer in 2025 is one way some of the value could be unlocked in this discount, although it may see the value in the Russian holdings foregone. With the board aware of the small size of the trust and considering its options if the conditions for a tender offer are met, a full continuation vote may end up being on the table too. In our view, BEMO is a highly attractive NAV story with the potential for shareholders to achieve attractive returns if the NAV does well, or even if the NAV does not.