Attractive income and capital growth: Barings Emerging EMEA Opportunities

BEMO aims to provide capital growth and an attractive level of income via investments across emerging Europe, the Middle East and Africa…by Thomas McMahon

Overview

Barings Emerging EMEA Opportunities (BEMO) invests in the diverse set of countries in the emerging markets of Europe, Middle East and Africa, a universe of countries experiencing rapid economic growth and development which are increasingly growing in weight within EM benchmarks but have historically been under-researched.

Emerging EMEA includes the Middle East, a rapidly developing and modernizing set of countries, where governments are utilizing resource revenues to further diversify their economies and push through a reform agenda underpinned by digitalization.

It also invests in South Africa, which is resource-rich and has favourable demographics. Emerging EMEA has the distinct advantage of being a low cost producer of key resources, metals and liquids, that are not only necessary for today’s economy but have an important role to play in providing the materials and minerals required for the green energy revolution.

Another key component is Eastern Europe where BEMO’s managers, Matthias Siller and Adnan El-Araby, have recently been finding attractive opportunities. BEMO has a substantial overweight to emerging European financials, which they think are well placed to sail through any volatility stemming from the recent issues with developed world banks (see Portfolio section).

Matthias and Adnan follow a GARP (growth at a reasonable price) investment strategy that considers both growth and valuation, and emerging European financials have been attractive on both grounds. Strong earnings growth trajectories have been boosted by Europe’s resilient economic performance in the face of high energy prices and geopolitical risks.

BEMO has a historic yield of 3.6% at the time of writing. Income growth is a key characteristic Matthias and Adnan look for in portfolio companies, and they believe the earnings trajectories of their portfolio should help BEMO continue to pay an attractive dividend. Additionally the board can add up to 1% of NAV to the dividend each year from capital. They have not done so over the past two years, and so this is a potential second source of dividend growth in the future.
 

Analyst’s View

Emerging EMEA is a diverse region with a number of attractions: high GDP growth, low inflation in the Middle East, attractive demographics and exposure to some key trends such as the energy transition.

The region is also well placed to benefit from global growth dynamics in both the east and west, such as Europe’s improved economic outlook and the reopening of China’s economy. The cyclical nature of the EM EMEA benchmark, caused in part by its large weights to financials and resources, may contribute to BEMO being on a wide discount.

However, the managers are focused on identifying and investing in companies with structural earnings growth that should offset this cyclicality over the medium term. Additionally, the potential for earnings growth could see BEMO play a role as an income diversifier. Although the 3.6% yield at the time of writing is not high, there is the potential for growth over the long run which may suit investors with a long-term time horizon.

Last year was disappointing for BEMO shareholders, with the unforeseen invasion of Ukraine leading to the write-down of Russian equities held by foreign investors such as BEMO to zero. Critically, there is no further exposure to the country on the downside, only potential upside in the event of peace and the resumption of economic ties that may lead to a revaluation of Russian assets currently held by the trust.

At the time of writing, BEMO is available on a wide discount of 19.6%, the widest in the global emerging market sector. This could prove to be a good long-term entry point, although we think the discount may persist while investors fret about the possibility of recession in key global markets.

Bull

• Offers attractive diversification to the typical exposure of a global or global emerging markets trust
• Has devoted considerable resources to the trust’s under-researched markets
• Can invest in both fossil fuels and materials with a role to play in the green energy revolution

 
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