JPMorgan Emerging Europe Middle East and Africa has published results covering the 12 months ended 31 October 2024. Pleasingly, the trust beat its benchmark (S&P Emerging Europe, Middle East & Africa) by 1.7 percentage points, returning 13.6% on NAV to the index’s 11.9%. However, the share price continued its usual volatile and unpredictable path and shareholders ended up with a return of just 0.9% for the period (the shares traded between 120.5p and 244.0p during the period). The dividend is being maintained at 0.5p per share and this is covered by earnings of 0.56p.

A discussion of the trust’s legal travails in Russia dominates the chair’s report and you’ll have to read the extracts from the manager’s report below to discover what drove the NAV returns.

Extracts from the chair’s report relating to Russia

The tragic events in Ukraine since Russia’s military invasion on 24th February 2022 sadly continue to cast a shadow over the global economy. The strict economic sanctions that followed the invasion have continued to reduce the valuation of the Company’s Russian assets. Additionally, the rouble has continued to reduce in value against sterling and other currencies further reducing the already heavily written down value of Russian assets in the Company’s balance sheet. Despite the expiry of certain Office of Foreign Assets Control (OFAC) licences during the reporting period which added to the existing uncertainty about the realisation of the Company’s Russian securities, the Company retained the 99% provision for valuation of the Russian assets, as set out in the Company’s announcement made on 29th October 2024.

With one exception, the Company has not engaged in any disposals of its Russian assets during this period. On 10th October 2024, the Company announced the sale of its stake in Nebius (formerly Yandex), a security that had been previously sanctioned. As detailed in the announcement, the sale should not be taken as an indication that similar sales can be made for the other Russian securities held by the Company. The sale arose because Nebius decoupled from Yandex’s business in Russia, ceased to be sanctioned under US sanctions as a result, and became solely listed on western exchanges giving rise to its relocation outside the Emerging Europe, Middle East and Africa markets in which the Company invests.

As detailed in the numerous RNS announcements that the Company has released in this reporting period and up until the date of this report, in the first half of 2024 VTB made a claim in the Russian courts against a number of J.P.Morgan legal entities, including JPMorgan Bank International (the Russian sub-custodian for the Company’s Russian assets) and the Company. As detailed in the Company’s RNS announcement of 18th October 2024, the Russian courts granted VTB’s claim in full against the Company and seven other named defendants. The Russian court has announced an appeal hearing date of 26th February 2025. The announcements included reference to the possibility that, if VTB’s claim was to be successful, it may result in the insolvency of the Company’s sub-custodian in Russia and may constitute a Force Majeure and or Country Risk event (as defined in the contracts that clients have with J.P. Morgan). If the Russian sub-custodian were to be declared insolvent, the Manager has advised us that the Company’s Russian assets could not be serviced by them and due to the current sanction regime it would not be possible to transfer the Company’s Russian assets to another custodian. The Board will provide a further update once more information becomes available. The Russian Court continues to allow VTB to include the Company in the list of defendants despite being a separate client entity, rather than a proprietary entity of the J.P. Morgan Asset Management group.

In addition, as detailed in a prior RNS announcement, on 8th October 2024 VTB made two further claims in the Russian courts against the same J.P.Morgan legal entities and the Company, but no final determination has yet been made in either claim.

The RNS announcements released in the reporting period have referred to the protection that the Company may derive from Russian Decree 8 which offers protection to client securities and RUB cash in S type accounts from the enforcement of court decisions issued after 3rd January 2024. The Russian courts have so far respected this. However, the situation remains dynamic. In addition, Presidential Decree 442 published on 23rd May 2024 established a framework for compensating the Russian Federation and/or the Central Bank of Russia for damage caused by ‘unfriendly’ actions of the United States of America. Decree 442 indicated that a detailed procedure would be published within four months, however, details of that further procedure remain yet to be published and analysed by market participants.

In view of the early stages of the legal action, and taking account of the protection of the S type accounts and the unknown outcome, there has been no impact on the financial statements at 31st October 2024. As at 31st October 2024 the Company’s Russian investments amounted to 6.7% of the portfolio, although that figure should be considered in the context of the Company’s share price premium to net asset value per share of 129.5% as detailed in the Discount Control section below and in the context of the considerable uncertainty attaching to the value of its Russian assets. All these developments reinforce that there is much uncertainty of these values ever being realisable by the Company.

The management fee charged by the Manager continues to be based on the Company’s assets, excluding the value of the Russian holdings.

At present, the dividends paid from the Russian securities in the Company’s portfolio are held in a custody ‘S’ account in Moscow. The balance on the ‘S’ account as at 31st October 2024 was equivalent to approximately £31.7 million at the exchange rate applicable on that date. The Company’s Manager is monitoring the receipts into the ‘S’ account against dividends announced by the portfolio companies, although there is no certainty that the sums in the ‘S’ account will ever be received by the Company. The Board also monitors the underlying local value of the Russian assets, although there remains increasing uncertainty of these values ever being realisable by the Company.

In view of the unknown outcome of the VTB case at the appeal hearing date of 26th February 2025, there has been no impact on the financial statements as at 31st October 2024. As at 31st October 2024, an additional £3.6 million of dividend income from Russian portfolio companies has been announced but is yet to be credited to the S account. Your Board also monitors this in order to assess whether all dividends due are in fact accurately recorded in the ‘S’ account. The addition of this sum to dividends already in an ‘S’ account brings the total dividends received or announced in relation to our Russian holdings to £35.3 million. As previously detailed, these dividends cannot be remitted to the Company and may never be received. They are not recognised in the Company’s net asset value or in its income statement.

Extracts from the manager’s report

The performance of EMEA markets lagged that of the Emerging Markets Index, which increased 18.3% over the period. It also failed to match the 25.3% rise in the All Country World Index, which was underpinned by ongoing strength in US technology and related stocks with exposure to the rapid spread of artificial intelligence.

Most countries in the EMEA index made gains over the period. The notable outperformers included South Africa, which benefitted from a relief rally following May’s general election, as the incumbent ANC party was returned to power, albeit without a ruling majority. The improved political stability reduced the costs of capital for the market, leading to price appreciation. Hungary also outperformed, supported by the strong performance of Magyar Telecom and OTP Bank. In both cases positive earnings surprises led to higher prices. The Egyptian market was the most significant underperformer, due to capital control and currency devaluation. The Turkish market saw a rally in first quarter of 2024, but was subsequently hurt by valuation fatigue and the realisation that the disinflationary path would be harder than earlier anticipated.

Stock selection decisions contributed to relative performance over the year. Portfolio holdings benefited from a series of earnings surprises and upward revisions to earnings forecasts, thanks to companies’ efforts to strengthen their balance sheets and improve performance. The Company’s out-of-index holding in Halyk Savings Bank, a major Kazakh bank, was the most significant contributor to performance over the year. It boasts an impressive return on equity (RoE) of above 25% and a dividend yield of more than 7%. Parking, Dubai’s largest supplier of parking services, was another key contributor to returns following its successful initial public offering (IPO).

Other positive influences on performance included our decision to avoid Sasol, a South African chemical and energy company which we dislike due to the structural challenges it faces and the poor quality of its management. Our out-of-index position in Banca Transilvania – a niche player and national champion – also paid off, as did our holdings in telecoms providers Emirates Telecom and Hungary’s Magyar Telekom, and in Adnoc Logistics, a United Arab Emirates (UAE) oil services company with a dividend yield of over 4%.

Key detractors from returns included an underweight to Naspers, a South African internet content company with an interest in its Chinese counterpart, Tencent. This company does not pay an attractive dividend and following a rally which we viewed as unsustainable, we closed the position in H124. Our decision not to hold ACWA Power, a Saudi Arabian engineering and utilities firm, also detracted, but we are very wary of this name due to its massive leverage and very expensive valuation. We also avoided Capitec Bank, a South African bank, due to its high valuation. Our positions in several other banks, including Turkey’s Akbank, Poland’s PKO Bank Polski and Bank Pekao also detracted from returns due to changes in leadership and potential changes in their strategies. We reduced our position in Bank Pekao after the financial year end following a meeting with the new senior management due to concerns about the company’s new, highly politicised chief executive officer.

At the sector level, the portfolio’s underweights to materials (notably petrochemical companies), industrials and consumer staples were the most significant contributors, as these sectors underperformed the index over the year. Smaller underweights to healthcare and IT also enhanced returns. Our significant overweight to financials supported returns, as most of the portfolio’s bank names continued to benefit from high interest rates. A lesser overweight to energy was another positive contributor, thanks to stock selection and our preference for high income names over high capital intensity ones. A small underweight to consumer discretionary and a larger underweight to utilities (due in part to our decision to avoid ACWA Power, as mentioned above) were the main detractors.

At the country level, our overweight to UAE was by far the greatest contributor to performance, thanks to our participation in two successful IPOs (see further discussion below), and strong income from our holdings of real estate and bank stocks. Out-of-index positions in Kazakhstan and Slovenia also added, as high-income stocks re-rated, with many raising dividend payments. Returns benefited from our overweight to top performing market, Hungary, and from our underweight to the lagging Turkish market. Our decision to avoid Egypt, another underperforming market, helped, as did our underweight to Qatar, which declined due to lack of domestic growth.

The main detractors at the country level included an underweight to Saudi Arabia. Small cap stocks outperformed the larger cap stocks we favour in this market, and market volatility was unusually high over the year. An underweight to South Africa also hurt returns at the country level, as we missed the post-election rally in this market. Likewise, an underweight to Poland meant we missed the benefit of this market’s politically driven rally in Q423. An overweight to Greece detracted, as this market came under pressure from general concerns about EU growth.

Our legacy holdings of several Russian securities also detracted slightly from performance, as their value, which has already been written down, was impacted by the decline in the rouble versus sterling and other currencies.

JEMA : JPMorgan EMEA beats benchmark but still overshadowed by events in Russia