Barings Emerging EMEA (BEMO ) has managed to offload two of its Russian assets through the sale of global depositary receipts, a strategy the board of JPMorgan Russian, now known as an Emerging Europe, Middle East & Africa Securities (JEMA ), is watching carefully.

The two trusts were hit hard by the freezing of Russian assets as a result of the invasion of Ukraine, with all those holdings written down to zero.

However, activity has picked up and the £78m Barings trust recovered $1.6m (£0.8m) through the sale of Russian food retailer X5 and $669,834 from the sale of TCS in the middle of January.

The trust held the companies through global depositary receipts, which are settled through European clearing systems.  

‘As previously communicated, the company remains focused on how best shareholder value can be preserved, created and realised in relation to the holdings of Russian assets,’ said chair Frances Daley in a stock exchange statement.  

Both Barings and JEMA participated in tender offers from Russian companies last year, which are permissible under sanctions. The former made $578,257 and the latter gained £2.35m, which is held in a custody account along with dividend income.

JEMA is also keeping one eye on Barings’ recent sales and noted in its annual results released on 24 January that ‘some Western institutions have been able to sell Russian stockholdings at a substantial discount to local exchange values where they are held through depository receipts in exchange for western currencies’.

‘Most of our holdings are held directly on the local exchange and some depository receipts,’ said chair Eric Sanderson. ‘Where permissible and beneficial for shareholders under the current sanctions regime the company’s investment manager may consider such actions’.

Analyst Gavin Trodd who works at Numis, the broker for JEMA, said ‘We expect that realisation of proceeds would be welcomed by investors and it will be interesting to see how that compares to carrying value.’

Maiden results

The annual results were the JEMA trust’s first under its new remit as an Emerging Europe, Middle East & Africa fund and it reported an outperformance in the eight-month period since the alteration.

The £20m trust managed by Oleg Biryulyov and Pandora Omaset saw net asset value (NAV) increase 2.2% versus the S&P Emerging Europe, Middle East & Africa BMI index’s 0.1% gain in sterling terms, driven largely by companies in Saudi Arabia, South Africa and UAE that make up two-thirds of assets, full-year results showed.

Sanderson highlighted that the new stocks were added to the portfolio near the end of the first half of the reporting period, giving them little time to make an impact on revenue over the 12-month period.

Post-tax profits totalled £306,000, or 0.76p per share, a big drop from £3.4m a year ago, but enough to cover the 0.5p dividend. Similarly, 12-month performance showed NAV was unchanged, despite strong performance from telecom stocks. 

The shares continue to trade at a highly unusual 167% premium to NAV, which is a reflection of the market’s view of what JEMA’s net assets are valued at and the likelihood of accessing the Russian assets, the board believes.

‘[It] should not be interpreted as an indication that investors are more likely to derive any value from the Russian shareholdings,’ Sanderson wrote.

The change of investment focus also meant the reinstatement of the 1.22% management fee, which had been waived since Russia’s invasion of Ukraine in February 2022, but Russian holdings are excluded from calculations.

Performance since the benchmark change

Source: Morningstar

The portfolio 

Biryulyov and Omaset believe that US inflation will remain high for some time, but that the economy will not slip into a recession, which will boost global sentiment. However, higher interest rates suggest growth across Europe, the Middle East and Africa will slow in 2024.

The pair remain positive about Greece, with expectations of 3% gross domestic product growth this year off the back of a strong 2023 driven by the improvement of its debt quality, while Hungary’s taming of inflation is also likely to accelerate growth.

Poland’s prospects are not as bright, with tight fiscal policy likely to constrain activity, which consumer spending will not make up for. Rising oil prices in line with Opec’s cut in daily production will remain the key driver of economic performance in the Middle East.  

South Africa and Turkey see key elections this quarter. In South Africa, the pair believe that the election will maintain the status quo, with the African National Congress (ANC) retaining its grip on power.

Following Turkey’s municipal elections, which may reflect President Erdogan’s low popularity, there is likely to be an acceleration of monetary tightening to address inflation and currency devaluation, increasing risk. As a result, the pair will maintain no exposure to the region in the short term.

The pair have increased their weighting to UAE, which makes up 14.2% of assets, through the likes of Humansoft, a Kuwaiti education company; Oredo, a Qatari telecom company; and Arabian Centres, a Saudi real estate business. They also reinstated a position in Greek telecom company OTE, which has since seen its share price fall off the back of ongoing competition.

‘We are most positive about Greece,’ They wrote. ‘We view Greece as a classic rerating story – unloved and under-owned but possessing great potential, led by the country’s banks, thanks to an advantageous funding arrangement provided by the European Central Bank.’

Financials make up almost half the portfolio at 41%, according to the December factsheet, with the largest individual positions being Saudia Arabia’s Al Rajhi Bank, Saudia Arabian Oil and Saudi National Bank, which have respective weightings of 5%, 4.4% and 3.3%.