Results analysis: Barings Emerging EMEA Opportunities

• BEMO has reported excellent results for the year ending 30 September 2021. Absolute returns were high, with a 36.6% NAV total return for the period. On a relative basis this represents significant outperformance of the benchmark, which returned 33.3%. The shares gained 39.7% on a total return basis as the discount narrowed over the period. The mainstream emerging markets index returned just 13.3%.
• The vast majority of the period reflects the performance of the broadened strategy, which invests across the EMEA region rather than focusing on emerging Europe – the strategy changed in November 2020, before which the trust was named Baring Emerging Europe.
• Returns were boosted by a sharp rally in the energy sector, with BEMO’s positions in Gazprom, Novatek and Lukoil amongst the key contributors. BEMO offers exposure to both sides of the energy transition, investing in fossil fuels producers as well as companies enabling the shift to renewable power sources. This includes Norilsk Nickel and AngloAmerican which produce nickel, a key component in electric vehicles.  
• Key contributors from the new countries in the trust’s universe included Saudi-based Al Rajhi Bank and Qatar National Bank. Meanwhile the trust’s benchmark offers access to opportunities in growth sectors as well as traditional value sectors: Russian digital-only bank TCS was another key contributor over the year.
• The board raised the dividend for the 2021 financial year, paying out 26p compared to 25p a year earlier. This was not fully covered by the income account, which produced net revenue per share of 23.86 pence per share, up from 18.3p.
• Chairman of the board Frances Daley commented that paying an uncovered dividend reflected the board’s confidence in the manager’s ability to grow earnings over the medium term. She said: “This trend bodes well for the performance of the portfolio and the income generated by the companies in the portfolio. Underpinning this earnings growth is the strength of the consumer. High disposable income growth across most parts of the region, combined with ongoing efficiency gains, will remain a key driver of earnings over the medium term.”

Kepler View

The 2021 financial year was an excellent one for Barings Emerging EMEA Opportunities’ (BEMO) shareholders. The reflationary rally following the emergence of vaccines was very positive for the trust’s region, particularly the banks, energy and materials sectors. We think this mix of sectors is a potentially valuable one and an interesting hedge for a more inflationary environment.  Additionally, BEMO offers access to growth opportunities in consumer and technology-related sectors which benefit from the large and growing middle classes across the region.

Overall, BEMO represents a highly differentiated proposition which we believe could offer attractive diversification to many investors. The global emerging markets index is dominated by north Asia, while the EMEA region makes up less than 10% of the index. As a result, investors are unlikely to have much exposure to these countries. However, in general they display high GDP growth potential, growing middle classes and good domestic growth stories which should be less correlated to global markets than the North Asian giants. In addition, the countries covered by BEMO’s mandate have contrasting economic and other characteristics; and this internal variety helps mitigate risks.

BEMO is now the only investment trust with a focus exclusively on EMEA, and benefits from the attractions of the IT structure, including the ability to smooth dividends via revenue and capital reserves. It also has a management team with a strong track record of generating alpha. The first set of results under the new strategy have seen them continue this track record and are promising for the future.

Despite the strong results this year, BEMO still trades on a considerable discount of 13.1%. We think this could be an opportunity for long-term investors. Of course, this is a region with many risks, and the resurgence of the pandemic could see various countries in it – like South Africa – hit hard. However, the mix of countries within the portfolio should provide some protection against this, and it has a high potential sensitivity to any eventual recovery from an omicron wave. Notwithstanding the risks described above, in the long run the exposure to global themes like the shift to renewables and the rising middle classes in the region offer the possibility of excellent returns.

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