Fidelity Emerging Markets Limited (the 'Company or 'FEML')

Legal Entity Identifier: 213800HWWQPUJ4K1GS84

Half Year Report and Unaudited Financial Statements for the six months ended 31 December 2021

Total Return in GBP for the six months to 31 December 2021

Source: JPMorgan and Datastream.

1 Includes reinvested income.

2 Alternative Performance Measure.

As at 31 December 2021

Summary of the key aspects of the Investment Policy

The Company aims to achieve long term growth by primarily investing in securities and financial instruments providing exposure to emerging markets companies.

The Investment Manager invests at least 80% in companies with head offices, listings, assets, operations, income, or revenues predominantly in or derived from emerging markets.

A diversified portfolio of at least 75 holdings in companies listed or operating in at least 15 countries is maintained.

The Company may also invest into other transferable securities, investment companies, money market instruments, unlisted shares, cash and deposits. It is able to use derivatives for efficient portfolio management, to gain additional market exposure (gearing), to seek a positive return from falling asset prices, and for other investment purposes.

Financial Performance

1 The value of the portfolio exposed to market price movements.

2 Alternative Performance Measure.

3 Gross Asset Exposure less Equity Shareholders' Funds expressed as a percentage of Equity Shareholders' Funds.

4 Net Market Exposure less Equity Shareholders' Funds expressed as a percentage of Equity Shareholders' Funds.

Chairman's Statement

I am pleased to present to shareholders the Half Year Report and Unaudited Financial Statements of the Company for the six months ended 31 December 2021.

Recent developments in Ukraine

In recent days, during the final stages of drafting this report, Russia has invaded the Ukraine. Although these events follow the period under review, it would be remiss of us not to reflect briefly on the implications for emerging markets and for the Company.

This military action is the culmination of tensions that have been building in the region, and between Russia and western democracies in recent months. However, the speed with which the situation escalated caught governments and investors alike by surprise.

The situation is fluid and changing rapidly, we are therefore limited in the conclusions which we can currently draw, however it is apparent that sanctions impacting Russian companies are likely to be in place for some time, and further market volatility is expected.

The Company had an above-benchmark allocation to Russian companies going into this crisis, reflecting the Investment Manager's positive view on the strengths of the individual businesses within the portfolio, but as set out in this report this was reduced significantly with an index hedge position in December as political tensions worsened. At the time of writing the Company has reduced its net exposure to Russian securities to 1.95% compared with an index weight of 2.22% (as at 25 February 2022). The Investment Manager is monitoring the situation closely and will endeavour to keep shareholders informed of relevant changes to the portfolio or situation as frequently as possible. Please refer to the company's website fidelity.co.uk/emergingmarkets for the latest updates.

Overview and Summary of Changes

The six months to 31 December 2021 saw significant changes to the Company. A new investment policy and an overhauled portfolio have been introduced. These include the use of an extended investment toolkit, permitting derivatives which provide the ability to profit from the fall in value of shares - commonly referred to as shorting. The Company also made a substantial return of capital to shareholders as part of a tender offer. These changes coincided with a volatile period for emerging markets, and consequently for the investment returns of the portfolio.

Over the six-month period the net asset value fell by 9.3% and the share price declined by 10.7%, compared with a 7.4% decline in the Company's benchmark index, the MSCI Emerging Markets Index. Further details about the drivers of performance is provided in the Investment Manager's Half Year Review.

As described in the Annual Report for the year ended 30 June 2021, on 1 October 2021, the Company changed its name from Genesis Emerging Markets Fund Limited to Fidelity Emerging Markets Limited. On 4 October 2021 FIL Investment Services (UK) Limited was appointed as the Alternative Investment Fund Manager of the Company ('the Manager'), with the investment management of the Company to be undertaken by FIL Investments International ('Fidelity International', 'the Investment Manager'), collectively 'Fidelity'.

Tender Offer and Portfolio Transition

Following the appointment of Fidelity, the process of registering these changes with the relevant exchanges, and the transitioning of the portfolio began. In parallel, Fidelity worked to identify the assets to liquidate in support of the Tender Offer which took place during that month. On completion of the Tender Offer on 22 October 2021, a total of 30,366,688 Participating Preference Shares (25% of the Company's issued share capital) were repurchased by the Company for cancellation. The result of which being that the number of Participating Preference Shares in issue reduced to 91,100,066.

The Company subsequently announced on 1 November 2021 that the portfolio transition was substantially complete - and that there had been significant changes to the largest holdings within the portfolio.

Investment Performance and Market Context

During the second half of 2021, investors continued to grapple with economic uncertainty driven by the pandemic, increased regulation in China, geopolitical tensions, and an increasingly hawkish tone from the US Federal Reserve.

As set out above, the rapid escalation in geopolitical tensions between Russia and the West over the Ukraine has hampered performance more recently. The Company's overweight position in Russia into December reflected strong conviction in a series of entrepreneurial businesses which overall performed well in 2021; however a deterioration in relations during late 2021 and into the new year was detrimental to performance as fears of invasion were realised and a raft of international sanctions were deployed. As a prudent measure, the Investment Manager has introduced an index short to provide some protection against growing market risk in Russia.

2021 AGM and Final Dividend

The Company held its Annual General Meeting ('AGM') on 8 December 2021, and as ever, I appreciate shareholders' support and thank you for your approval of all resolutions presented at the meeting.

A final dividend of 13.44p (18.0 cents) per Participating Preference Share was approved by shareholders and paid on 17 December 2021.

Outlook

Amid the volatility, opportunity emerges to acquire good quality businesses at particularly attractive valuations. It is not the first and will not be the last time that geopolitical tensions have impacted on short term performance of emerging markets in general and Russia in particular. The Board is confident that the team at Fidelity has the necessary experience to navigate these turbulent waters and we believe that despite undeniable short term uncertainty the long term case for investing in emerging markets remains strong.

Hélène Ploix

Chairman

1 March 2022

Investment Manager's Half Year Review

Performance review to 31 December 2021

Over the six-month period ended 31 December 2021, the net asset value ("NAV") of Fidelity Emerging Markets Limited fell 9.3% and the share price declined by 10.7% compared with a 7.4% decline for the benchmark index.

During 2021, investors grappled with economic uncertainty, pandemic-induced disruption, mounting regulation, geopolitical tensions, and an increasingly hawkish tone from the US Federal Reserve. The result was a period of substantial bifurcation in returns: oil-rich countries soared in contrast to Chinese equities.

China fell from favour as policymakers imposed regulatory restrictions on technology, education, and other new-economy sectors as part of president Xi Jinping's drive for "common prosperity". Volatility, as a result of the actions, was soon overshadowed by a crackdown on high levels of borrowing (leverage) across the real estate sector. Evergrande, the world's most indebted developer, was engulfed by a liquidity crisis. More broadly, consumption slowed as retail sales and consumer activity were constrained by the pandemic and extreme weather.

As market sentiment deteriorated, emerging market equities experienced the sharpest decline in valuation multiples in a decade. Valuations have clearly been impacted by higher inflation, but emerging market central banks have already responded with rate hikes, and, as inflation eases, it is reasonable to expect the market to re-rate. With a lot of negative news discounted in emerging market equity prices, this is a favourable environment for stock pickers to acquire good companies at attractive valuations on a medium to long term view.

Source: Fidelity International, as at 31 December 2021. Based on actual attribution. Attribution is gross of fees and exclude expenses. Holdings in different securities issued by the same company are aggregated, therefore country/region classification is according to that of the main issuer. Average Active Weight is average over or under-weight relative to MSCI Emerging Markets Index for the period 4 October 2021 to 31 December 2021.

Financial stocks generated strong returns through 2021 as economies re-opened and more cyclical areas of the market generally performed well. Innovation in the financial industry is abundant, and increasing demand for a broader range of financial products and services by a vast but underpenetrated consumer base offers a long and attractive runway for growth. However, some of the portfolio's financial holdings suffered as the market became more risk averse during the final months of the year.

Russia's TCS Group ('TCS') and Sberbank initially outperformed through to late October, driven by robust fundamentals and the strength of the domestic economy. However, growing fears of Russia invading Ukraine sparked a sell off as investors weighed up the risk of sanctions which are now being enforced. TCS was the most significant detractor despite no suggestion that its business would be sanctioned. TCS has delivered strong double-digit earnings growth over the past five years and recently reported impressive results, however, this was overlooked by the market in favour of derisking. Sberbank was also sold by the market as fears of sanctions grew.

In December it became apparent that risk in the Russian market was elevated and we took steps to mitigate some of the risks. Over the course of the last decade, we have seen a series of sharp selloffs driven by events such as the Mueller Investigation and the annexation of Crimea.

We maintained an overweight position in the market into 2022 because of our bottom-up stock picking approach. Whilst we cannot predict events over the days and weeks ahead, we do not dismiss the idea that markets may sell down further. The extent to which the market has already derated is reflected in MSCI Russia trading at circa 11% dividend yield as of 31 December 2021, and considerably cheaper valuations since the period end. Amongst our holdings we see meaningful valuation support, and attractive yields at the stock level although the risks in the market have changed in recent days. Positioning is well diversified across a series of holdings, consisting of strong domestic franchises such as TCS and low-cost producers in areas such as steel and fertiliser. Indeed, the exporters have been remarkably resilient through this period of market turmoil.

Importantly, using the tools available to us, as a prudent measure, we introduced an index short on the Russian market to provide some protection against broader market risk. The hedge significantly reduced the previous overweight by approximately 9.5% (as of 31 December 2021). However, given the high yield of the Russian Market, this hedge position has commensurately reduced the income of the Company for the period, based on the dividend paid by the ETF being shorted in December, as reflected in the income statement. It did, however, provide a degree of capital protection as Russian markets sold off.

India's HDFC Bank was caught in broad-based weakness in global equities following fears around the Omicron variant and a more hawkish Federal Reserve. In India, concerns were exacerbated by a series of losses in local financial institutions that affected sentiment towards the entire sector. Hong Kong-based insurer AIA Group's third quarter earnings disappointed investors and reflected pressures from new Covid-19 outbreaks in the ASEAN region and the ongoing Hong Kong-China border closure.

The second half of 2021 was a stronger period for our holdings in the IT sector. Media Tek, a leading fabless design company based in Taiwan with products focused on smartphones, consumer electronics and the 'Internet Of Things', reported market share gains following high demand for its 4G chipsets and competitive 5G System‑on‑Chips (SOC). South Korea's SK Hynix received a boost after China approved its deal to acquire Intel's NAND unit, further cementing its industry position. Intense buying by foreign investors supported South Korean tech stocks including Samsung Electronics. In Software and Services, Infosys, a global consulting firm that draws on India's large and highly educated workforce, saw further market share gains.

Despite Brazil's poor market performance, heavy equipment rental company Armac rose on outstanding revenue growth. More broadly, positioning in Brazil was rewarded. A local digital payment company held in the short book saw its share price collapse as the company reported heavy net losses due to a write-down in the fair value of its investments. During the final months of 2021, shorting activity made an important contribution to performance in a falling market.

Canada-listed First Quantum Minerals, a miner with assets in Zambia and Panama, outperformed in a period of extreme physical shortages in the copper market. While these short term drivers of the stock are important, we maintain a positive view on copper underpinned by medium term supply constraints and the transition to a greener economy, which we believe will lead to rising long term structural demand following years of underinvestment in mining assets.

We are prudent in our approach, and careful to ensure that this high conviction portfolio is balanced and capital is allocated to companies that demonstrate quality characteristics such as healthy balance sheets and superior and sustainable profits. This half year has been a tumultuous period, but experience has repeatedly taught us that fundamentals are rewarded over time and share prices follow the trajectory of earnings.

Investment Strategy

Over the past decade we have fine-tuned a strategy that utilises a suite of investment attributes to uncover opportunities in this vast universe. For the long book, we are resolutely focused on identifying dominant franchises that are able to take advantage of structural growth opportunities. For short positions (where we seek profit from the fall in value of shares), we target the weakest stocks most exposed to competitive threats and financial distress. The ability to complement long investments with short positions provides additional sources of returns and is supported by our extensive global network of research analysts. Stock picking dictates the shape of the portfolio, while sector and country positions are a residual outcome of this approach.

In 2021, we actively reduced exposure to Chinese companies, adopting a more cautious stance on the internet sector and companies exposed to the capital cycle. There will be casualties from the government's push to clean up the property sector, but winners will also emerge. Recently, we have taken advantage in oversold sectors, adding China Overseas Land & Investment (COLI), a safe and conservative developer that was trading at a bankruptcy price. The collapse of Evergrande will lead to a more consolidated real estate sector in the future with less leverage in the system. Overall, 2022 will be a challenging year for China, but the bad news is largely reflected in the price. As the economy and regulatory environment stabilises and as we gain confidence, we will build exposure.

Across Emerging Asia more broadly, we continue to believe that a series of pre-eminent information technology companies such as TSMC, SK Hynix and Samsung Electronics can deliver attractive shareholder returns. The market obsesses over short term demand, the long term story is of exponential growth in data, and these companies play a crucial role in providing the building blocks for processing power and storage. Alongside these holdings we maintain exposure to other leading but lesser known companies such as Silergy and MediaTek.

The magnitude of the overweight reflects the extent to which the largest holdings are highly liquid stocks in which we have high conviction. In a global sector such as tech, we are inclined to own the very best businesses in scale. For example, TSMC has built a technological moat over the past 3 decades and occupies an especially dominant position at the leading-edge as tier 2 competing foundries have dropped from the race due to technical hurdles and a high capex barrier. TSMC's position has been cemented by its ability to hire the best talent while continuously improving its know-how which keeps it ahead of the competition, while generating cash flow to feed back into investing in Research and Development and capacity.

Similarly, our holdings in the materials sector are largely driven by long term structural drivers. Tightening emissions regulations and government incentives are lifting demand for cleaner fuels and electric vehicles. Companies in related industries are also a rich source of ideas as we look forward to a decarbonised future. Accelerating adoption of electric vehicles promises ongoing demand for copper, which serves multiple purposes in the production chain. Demand for copper is also driven by the rollout of 5G. We own copper miners Grupo Mexico and First Quantum Minerals.

Commodities play an important role in emerging markets by acting as a hedge in an inflationary environment. As prices have risen in the energy complex, we continue to hold Russia's Gazprom. The company benefits from high liquified natural gas prices as a result of scarce supply and strong demand from Asia, amid the accelerating transition from coal to gas in the absence of sufficient alternatives. We also hold steel manufacturers NLMK and Ternium, and fertiliser producer Phosagro. These cash generative exporters offer attractive dividends and help balance the portfolio. In inflationary periods where value stocks tend to lead the market, these holdings are typically among the stronger performers.

Arguments that inflationary pressures are transitory are being dismissed, and central banks across the world are evaluating interest rate rises while delicately managing the recovery. Emerging markets central banks proactively began to hike rates when major central banks were still dovish. Normalising monetary policy generally supports core earnings for banks in the developing world, we have a good level of exposure to financials.

South East Asian Banks HDFC Bank and Bank Central Asia have strong fundamentals and have come out stronger from the pandemic.

Growing population, favorable demographics, and low credit penetration in their respective country is also supportive of healthy prospects.

Fintech innovation continues to emerge, and financial institutions are expanding their online propositions. Our preference is for high quality financials with a consistent focus on asset quality that exhibit a long runway for growth with market share gains and greater cross-selling potential. Among our largest positions in financials are Kaspi, HDFC Bank, TCS, Chailease and Bajaj Finance.

Whilst the position in financials is large, the exposure is diversified across geographies and activities. We are exposed to a series of innovative fintechs, more traditional banks, insurers, and consumer lending firms. Rather than being a global sector, where stocks move in tandem these businesses are far more influenced by the local domestic dynamics. In many cases, particularly in more expensive markets such as India, the financial sector can offer a route to a large and burgeoning consumer base at a more attractive valuation than traditional consumer stocks.

Given the flexible nature of the Investment Company, we actively seek ideas in smaller companies. Brazil's Pet Center Comercio offers pet food and goods in a growing market where the company benefits from a favourable market structure and growth potential in its store base. In industrials, Brazilian transportation company Vamos operates in an underpenetrated truck rental market. HeadHunter is a leading classified jobs company in Russian speaking countries. We also own under-researched stocks such as Alphamin, a pure play metal producer with an exceptional fundamental outlook. It controls the leading tin deposit in the world, has a double digit free cashflow even at low tin prices, and trades on an attractive valuation. Upside potential comes from rising tin prices or higher production. The decision to buy Alphamin is testament to the scale of Fidelity's research platform; the stock has no broker coverage at all.

Shorting activity is core to the approach and is reflected in a series of positions across sectors and countries to maintain a balanced portfolio. We continue to short individual stocks and, as mentioned, have introduced an index hedge to provide portfolio protection in Russia given elevated geopolitical tensions in the Ukraine. At a stock level, we are selectively shorting in areas such as Chinese EVs where competitive intensity is rising, retailers that are absent an online proposition, debt-laden and high-cost commodity producers, and expensive banks with minimal growth prospects in the Arabian Gulf.

Despite current volatility, we believe that fundamentals will return to the fore as the unprecedented fiscal and monetary policy support begins to fade. Emerging markets have de-rated and the overall discount to developed markets is wide. We are confident this portfolio remains resilient with enduring quality characteristics centred around high returns, conservative balance sheets and low valuation multiples, and has the capacity to deliver attractive total shareholder returns in the long term.

Use of Derivatives

During the review period, the Company adopted the use of contracts for difference ("CFDs") to gear portfolio long exposure and to deploy short positions. Whilst new to the investment company this strategy has been adopted by the investment team since 2011 and enables the portfolio managers to exploit a significant number of attractive investment opportunities with meaningful return potential. The decision to extend the long book is balanced with a series of short positions resulting in a net market exposure of 98.4% at the end of December. The use of shorting techniques is subject to stringent oversight and risk management.

Post-Balance Sheet Update on Russian Exposure - 25 February 2022

As set out in the Chairman's Statement and throughout this report, following 31 December 2021 the situation in Ukraine has deteriorated rapidly.

Additional sanctions have been applied to a variety of Russian companies, and we are therefore taking this opportunity to update on the Company's exposure to Russian markets and securities to the most recent date practicable:

Breakdown of Russian Exposure as at 25 February 2022

Source: Fidelity International

Nick Price

Portfolio Manager

1 March 2022

Twenty Largest Investments

as at 31 December 2021

The Asset Exposures shown below measure the exposure of the Company's portfolio to market price movements in the shares and equity linked notes owned or in the shares underlying the derivative instruments. The Fair Value is the value the portfolio could be sold for and is the value shown on the Statement of Financial Position. Where a contract for difference ("CFD") is held, the fair value reflects the profit or loss on the contract since it was opened and is based on how much the share price of the underlying shares has moved.

1 Asset Exposure is expressed as a percentage of net assets.

2 Asset Exposure comprises market exposure to investments of $1,108,992,000 plus market exposure to derivative instruments of $458,744,000.

3 Portfolio Fair Value comprises investments of $1,108,992,000 plus derivative assets of $7,668,000 less derivative liabilities of $16,241,000 (per the Statement of Financial Position).

Interim Management Report

Principal and Emerging Risks and Uncertainties

The principal risks facing the Company are market risk, liquidity risk, custody risk, investment and investment strategy risk, share price movement and discount risk, operational risk, and credit and counterparty risk. Full details of these risks and how they are managed are set out on pages 10 to 14 of the Company's Annual Report for the year ended 30 June 2021 which is available on the Company's website at www.fidelity.co.uk/emergingmarkets. The principal risks have not changed since those detailed in the Annual Report. The Board continues to monitor the principal risks facing the Company.

Emerging risks that could impact the Company in the future are considered at each Board meeting along with any mitigating actions. In the Annual Report to 30 June 2021 we noted the risks associated with the Covid-19 pandemic and the Chinese property sector (including concerns about the future of China Evergrande Group). These risks remain ongoing but are now largely discounted in equity prices. More recently, Russian equities have been under pressure stoked by rising geopolitical tensions between Russia and the Ukraine, leading to a sell-off in the domestic market. Given the Company's meaningful overweight in Russia at the end of the six month period, and an escalation in geopolitical tensions the Manager added an approximate -10% short on the Russian Index. The Manager continues to find individual opportunities in Russia but is wary of country risk currently. The introduction of the index short is a prudent risk mitigant. The Board and the Investment Manager will continue to monitor the situation closely.

Related Party Transactions

During the period under review, there were no transactions with related parties which materially affected the financial position or performance of the Company. Details of related party transactions are contained in the Annual Financial Report for the year ended 30 June 2021 which should be read in conjunction with this Half Year Report.

Going Concern

The Directors believe that the Company has adequate resources to continue in operational existence and meet its financial commitments as they fall due for a period of at least twelve months from the date of approval of the financial statements. Accordingly, these financial statements have been prepared on a going concern basis.

In considering this, the Directors took into account the Company's investment objective, risk management, the diversified portfolio of readily realisable securities which can be used to meet short term funding commitments, and the ability of the Company to meet all of its liabilities and ongoing expenses.

As a result of the ongoing Covid-19 pandemic, the Directors continue to pay particular attention to the operational resilience and ongoing viability of the Investment Manager and the Company's other key service providers. Following review, the Directors are satisfied that Fidelity and the Company's other key service providers have the necessary contingency plans in place to ensure that operational functionality continues to be maintained during the pandemic.

The Company has committed to hold a continuation vote in 2026 and every five years thereafter. In addition, the Company has committed to make a tender offer of up to 25% of the Participating Preference Shares in issue if the Company's NAV Total Return over the five years ending 30 September 2026 does not exceed the MSCI Emerging Markets Index over that period.

Responsibility Statement

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules, the Directors confirm that to the best of their knowledge:

·      the condensed set of financial statements contained within the Half Year Report has been prepared in accordance with IAS 34 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and return of the Company;

·     the Half Year Report includes a fair review of the development and performance of the Company and important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements;

·       a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·       the Half Year Report includes a fair review of the information concerning related party transactions.

For and on behalf of the Board

Hélène Ploix

Chairman

1 March 2022