Barings Emerging EMEA Opportunities 29 July 2022

Barings Emerging EMEA Opportunities (BEMO) is the only investment trust dedicated to the emerging markets of Europe, Middle East and Africa; a universe of countries with big potential which have little representation in mainstream emerging market indices or funds. There are also only two open-ended funds, out of the over 5000 in the Investment Association, which focus on this region, making BEMO a rare beast indeed. Yet, as we discuss in the Portfolio section below, the region has the potential to benefit from one of the major economic themes of the coming years – the energy transition – in a number of ways. The countries of the middle east offer an alternative source of fossil fuels to Russia during the transition, and high energy prices should have positive effects throughout their economies. Meanwhile, South Africa is home to companies in the mining sector which generate the raw materials needed for electric vehicles, solar panels and the like.

BEMO was known as Barings Emerging Europe until November 2020 when its universe broadened to encompass the Middle East and Africa, as well as Eastern Europe. BEMO had a material position in Russia prior to the invasion of Ukraine, which led to significant losses when it was written down in the aftermath of the invasion. The trust has traded on a wider than average Discount since the war broke out, and that is currently 18%.

The board has placed importance on the dividends paid to shareholders in the past and can make a contribution of up to 1% of NAV from capital to the annual payout. Due to the loss of income from the Russian holdings, the level of income which the portfolio can generate has been reduced. This was reflected recently in a reduction in the interim dividend.

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.

BEMO has been through a difficult patch recently, with the NAV taking a hit from the Russian invasion of Ukraine and the benchmark changing materially following the exclusion of Russian stocks from the MSCI universe. However, we believe it is time to look to the future. There is a case for investing in this collection of markets which could appeal to many. In particular we note the Gulf states are receiving renewed attention from international, professional investors. This has been boosted by the prospect of structurally higher energy prices thanks to the exclusion of Russian products from Western markets and a slowdown of investment in production by Western companies. Saudi Arabia, in particular, looks an even more critical source of hydrocarbons in the short to medium term. Meanwhile South Africa is rich in the minerals which are critical to the green energy revolution, be it for electric cars or solar panels. As a result, EMEA offers a way to play both sides of the energy transition. Additionally, we note the Gulf states were making efforts to encourage foreign investment prior to the invasion of Ukraine, impelled by their recognition that the era of fossil fuels is coming to an end.

At the time of writing, BEMO is available on a wide discount of 17.8%, the widest in the global emerging market sector. This could prove to be a good long-term entry point, although we note that the growing risks of a recession in key countries like the US may mean the immediate future is volatile.