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The Foreign & Colonial
Emerging Middle East Fund, Inc.
Annual Report
October 31, 1995
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Foreign & Colonial Emerging Markets Limited
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General Information
THE FUND
The Foreign & Colonial Emerging Middle East Fund, Inc. (the "Fund") is a
non-diversified, closed-end management investment company whose shares are
traded on the New York Stock Exchange ("NYSE"). Its investment objective is
long-term capital appreciation through investment primarily in equity securities
of Middle East issuers. Under normal market conditions, the Fund will invest at
least 65% of its total assets in equity securities of emerging Middle East
issuers, with an anticipated emphasis on Egypt, Jordan, Morocco, Oman and
Tunisia. The balance of the Fund's assets will be invested in equity and
corporate debt securities of other Middle East issuers and sovereign debt
obligations of Middle East countries.
THE INVESTMENT ADVISER
Foreign & Colonial Emerging Markets Limited (the "Investment Adviser"), an
affiliate of Foreign & Colonial Management Ltd, is the Fund's investment
adviser.
OTHER INFORMATION
Investment Objective
On November 22, 1995, the Fund announced that it would temporarily defer fully
investing its portfolio in accordance with its investment objective and
policies. As stated in the Fund's prospectus dated October 28, 1994, due to,
among other factors, the desire of the Fund to invest selectively and gradually
in order to avoid adversely influencing the prices paid by the Fund for its
portfolio securities, the Fund anticipated that it would take up to one year for
the Fund to be fully invested in accordance with its investment objective and
policies.
As of December 14, 1995, approximately 54.93% of the Fund's assets were invested
in equity securities of Emerging Middle East issuers, particularly in Morocco
and Egypt, approximately 39.17% of its assets were invested in equity securities
of issuers located in Israel and Turkey and approximately 5.90% of its assets
were invested in cash, foreign currency and other assets. The Fund is not
currently invested in Jordan because, as explained in the prospectus, certain
countries, including Jordan, limit or prohibit foreign investment. Jordan has
recently changed its law to permit foreign investment and, as of December 16,
1995, the Fund understands that it is now permitted to invest in Jordan, within
limitations prescribed by law. The inability to invest in Jordan has impeded the
Fund's ability to fully invest in accordance with its investment objective.
The Investment Adviser continues to believe that a gradual and selective
approach to investing will result in a more attractive investment portfolio and
produce beneficial results for the shareholders. Therefore, in light of this
approach, along with the Fund's inability, until now, to invest in Jordan and
political uncertainty in the Middle East region, the Investment Adviser expects
that the Fund will be fully invested in accordance with its investment objective
and policies by the end of March 1996.
Portfolio Management
Omar Masri has resigned as Vice President of the Fund, effective December 31,
1995. Scott Delman has assumed Mr. Masri's responsibilities and will continue to
advise the Fund under the supervision of Arnab Banerji, the Investment Adviser's
Chief Investment Officer. In addition, the Investment Adviser is currently
conducting a search for an additional portfolio manager.
Risk Factors
Investment in the Fund and investments in the Middle East involve risks and
special considerations which are not typically associated with investment in the
United States, Western Europe or other more established economies or securities
markets. These include risks associated with social, political and economic
uncertainty, price volatility, limited liquidity and small market capitalization
of the securities markets, less developed settlement procedures,
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high inflation rates and currency devaluations and other fluctuations in
currency exchange rates. The Fund may invest up to 35% of its total assets in
high yield, high risk debt instruments. The Fund may utilize leverage by
borrowing in an amount up to 25% of its total assets. There are special risks
and costs associated with leveraging. Substantially all of the Fund's
investments may be in illiquid securities.
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the NYSE Composite
Transactions section of major newspapers under the designation "ForClE" or
"ForegnColon". The Fund's NYSE trading symbol is "EME".
Net asset value and market price information about the Fund's shares are
published each Monday in The Wall Street Journal, each Sunday in The New York
Times and each Saturday in Barron's, as well as in other newspapers, in a table
captioned "Publicly Traded Funds". All inquiries regarding registered
shareholder accounts may be directed to the Fund's transfer agent, dividend
paying agent and registrar, State Street Bank and Trust Company, at
800-426-5523.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), shareholders
whose shares are registered in their own names are deemed to have elected to
have all distributions (net of any applicable U.S. withholding tax) reinvested
automatically in additional shares of the Fund by State Street Bank and Trust
Company (the "Plan Agent") as agent under the Plan, unless such shareholders
elect to receive distributions in cash. Shareholders who elect to receive
distributions in cash will receive all distributions in cash paid by check in
U.S. dollars mailed directly to the shareholder by State Street Bank and Trust
Company, as dividend paying agent. In the case of shareholders, such as banks,
brokers or nominees, which hold shares for others who are the beneficial owners,
the Plan Agent administers the Plan on the basis of the number of shares
certified from time to time by the record shareholders as representing the total
amount registered in the record shareholder's name and held for the account of
beneficial owners that have not elected to receive distributions in cash.
Investors that own shares registered in the name of a bank, broker or other
nominee should consult with such nominee as to participation in the Plan through
such nominee, and may be required to have their shares registered in their own
names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Board of Directors of the Fund declares a dividend or capital gain
distribution payable either in the Fund's shares or in cash, as shareholders may
have elected, participants in the Plan will receive shares of the Fund, as
outlined below. Whenever the market price per share is equal to or exceeds the
net asset value per share as of the valuation date, participants will be issued
new shares at a price per share equal to the greater of (a) the net asset value
per share on that date or (b) 95% of the market price per share on that date.
The valuation date will be the dividend or distribution payment date or, if that
date is not a trading day on the New York Stock Exchange, the immediately
preceding trading day. The Fund will not issue shares under the Plan at a price
below net asset value. If net asset value exceeds the market price of the Fund's
shares as of the valuation date, or if the Fund should declare a dividend or
capital gain distribution payable only in cash, the Plan Agent will , as agent
for the participants, buy shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts on or shortly after the
payment date. If, before the Plan Agent has completed its purchases, the market
price exceeds the net asset value of a share, the average per share purchase
price paid by the Plan Agent may exceed the net asset value of the Fund's share,
resulting in the acquisition of fewer shares than if the dividend or capital
gain distribution has been paid in shares issued by the Fund. Because of the
foregoing difficulty with respect to open-market purchases, the Plan provides
that if the Plan Agent is unable to invest the full dividend amount in
open-market purchases during the purchase period or if the market discount
shifts to a market premium during the purchase
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period, the Plan Agent will cease making open-market purchases and will receive
the uninvested portion of the dividend amount in newly issued shares at the
close of business on the last purchase date.
A shareholder may elect to withdraw from the Plan at any time upon written
notice to the Plan Agent. When a participant withdraws from the Plan, or upon
termination of the Plan as provided below, certificates for whole shares
credited to his or her account under the Plan will be issued and a cash payment
will be made for any fractional shares credited to such account. An election to
withdraw from the Plan will, until such election is changed, be deemed to be an
election by a shareholder to take all subsequent dividends and distributions in
cash. Elections will be effective immediately if notice is received by the Plan
Agent not less than ten days prior to any dividend or distribution record date;
otherwise such termination will be effective after the investment of the then
current dividend or distribution. If a withdrawing shareholder requests the Plan
Agent to sell the shareholder's shares upon withdrawal from participation in the
Plan, the withdrawing shareholder will be required to pay a $2.50 fee plus
brokerage commission.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant are held by the Plan Agent in noncertificated form in the
name of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital gain
distributions. The Plan Agent's fee for the handling of reinvestment of
dividends and distributions is paid by the Fund. There will be no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gain distributions payable either in shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or capital gain distributions.
The automatic reinvestment of dividends and capital gain distributions will not
relieve participants of any U.S. federal income tax that may be payable on such
dividends or distributions. To the extent dividends and distributions are
reinvested in additional shares issued by the Fund, participants should be
treated for U.S. federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the valuation date, of
the shares received (regardless of the net asset value of the shares on the
valuation date), and should have a cost basis in such shares equal to such fair
market value. Shareholders receiving a distribution in the form of shares
purchased by the Plan Agent in the open market will be treated for U.S. federal
income tax purposes as receiving a distribution of the cash distribution that
such shareholder would have received had it not elected to have such
distribution reinvested.
Experience under the Plan may indicate that changes thereto may be desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid (i) subsequent to notice of the
change sent to all shareholders of the Fund at least 90 days before the record
date for such dividend or distribution or (ii) otherwise in accordance with the
terms of the Plan. The Plan also may be amended or terminated by the Plan Agent
by at least 90 days' prior written notice to all shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at P.O.
Box 8209, Boston, Massachusetts 02266-8209.
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Report of the Investment Adviser
Dear Shareholder:
We are pleased to present the first annual report of The Foreign & Colonial
Emerging Middle East Fund, Inc. (the "Fund") for the period ended October 31,
1995.
The Fund's initial public offering of 2,800,000 shares was completed on November
4, 1994. The Fund commenced operations on this date with a total of $41,725,000
of equity capital, prior to the deduction of underwriting commissions and
offering costs.
At October 31, 1995, 47.79% of the Fund's assets were invested in equity
securities of Emerging Middle East issuers and 44.61% were invested in equity
securities of other Middle East issuers and debt securities of Middle East
issuers, maintaining its strategy of investing in large capitalization stocks
with exposure to a variety of promising sectors. Additionally, the Fund acquired
share holdings in smaller capitalization companies that the Fund's Investment
Adviser considered good investment opportunities in high growth sectors. On the
company level, the Fund concentrated on three sectors which are expected to
enjoy high growth rates in the foreseeable future: infrastructure, consumer and
trade. Given the minimal level of foreign participation, the region's equity
markets were relatively unaffected by global considerations, such as increases
in US interest rates and liquidity outflows from emerging market equities during
the Mexican currency crisis. As of October 31, 1995, the Fund's 10 largest
equity investments and country allocation were as follows:
TOP 10 EQUITY INVESTMENTS:
<TABLE><CAPTION>
PERCENTAGE OF
NET ASSETS
-------------
<S> <C>
Omnium Nord Africain (ONA "A" & "B")................................ 3.60%
Koor Industries..................................................... 3.31
Commercial International Bank (CIB)................................. 2.96
Societe Nationale d'Investissement (SNI)............................ 2.83
Super Sol........................................................... 2.83
Banque Commerciale du Maroc (BCM)................................... 2.80
Trakya Cam.......................................................... 2.61
Africa Israel Inv................................................... 2.58
Egyptian International Pharmaceuticals (EIPICO)..................... 2.44
Cimenterie de l'Oriental (CIOR)..................................... 2.18
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28.14%
=====
</TABLE>
COUNTRY ALLOCATION:
<TABLE><CAPTION>
PERCENTAGE OF
NET ASSETS
-------------
<S> <C>
Egypt............................................................... 23.48%
Israel.............................................................. 22.94
Morocco............................................................. 22.70
Turkey.............................................................. 20.67
Lebanon............................................................. 4.22
Oman................................................................ 2.04
</TABLE>
EGYPT
MARKET REVIEW
The Egyptian Stock Exchange ("ESE") has declined 19.7% in US$ terms since the
Fund's inception and 0.8% during the Fund's fourth quarter due to short term,
technical issues. Volumes, however, have picked up noticeably since July of this
year. The ESE remains predominantly a retail-driven market, and many investors
have attempted to speculate on new privatization issues.
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The Government is addressing the lack of equity on the stock market by slightly
accelerating state company share offerings. Even so, investor demand has
generally remained strong, leading to continued high levels of
over-subscription. Despite investor skepticism, the Minister of Privatization
recently announced his intention to privatize 21 tourism-related companies
during the first quarter of 1996. Dividend yields on most privatized enterprises
have averaged 12%, an attractive alternative to bank deposits.
On the demand side, several new domestic mutual funds have recently been
launched and others are expected to be in place before year-end. Foreign funds,
which have generally been slow to invest on the ESE, are also expected to
increase in number following the finalization of custody arrangements by two
major US banks. Furthermore, the IFC has indicated that its index will include
Egypt during 1996. Given the anticipated flow of new domestic and international
capital to the market, the introduction of a new computerized trading system in
October, and the steady supply of privatization issues, we expect the ESE,
currently trading at a P/E of 10.1 times prospective 1995 earnings, to steadily
rise over the coming months.
POLITICAL AND ECONOMIC REVIEW
The assassination attempt on President Mubarak's life demonstrates that security
problems beset the regime, despite sustained crackdown on militant Islamist
groups. We believe this attack should serve to strengthen the Government's
resolve to eradicate both the militant and the more moderate political Islamist
groups rather than move towards a compromise. The parliamentary elections at the
end of November have dominated political debate during the second half of 1995.
All of the opposition parties have announced their intention to participate
after their 1990 boycott merely allowed the Government to rule unopposed.
President Mubarak's current six year term does not expire until 1999.
While Egypt's foreign policy remains generally oriented towards the West, the
regional peace process has transformed the old order in the Middle East, and
this transition has important implications for Cairo. With US aid levels on the
decline and European aid on the increase, Egypt is expected to begin to focus
more closely on Europe. In particular, it is expected to seek the economic
advantages of classification as a Mediterranean country by the European Union
("EU").
Official projections are for real GDP growth of 4.5% in 1994-95 and 5.4% in
1995-96, coming from a continued recovery in agriculture, manufacturing, trade
and tourism. In addition, banking and financial services should continue to
record strong growth, and higher prices for oil and refined products will
provide further support. Government moves to deregulate the export regime and a
minor depreciation of the Egyptian pound are intended to assist export growth in
1996, continuing the export boom of 1995. The Government continues to adopt a
piecemeal approach to economic reform and is expected to manipulate the
timetable to minimize social costs. Once the parliamentary elections are over,
some momentum is expected to be restored to the reform process, which should
allow the International Monetary Fund ("IMF") to sanction Egypt's third and
final Paris Club debt write-off of $4 billion. The IMF recently backed down on
demands calling for a devaluation of the Egyptian currency.
Inflation has remained relatively high in 1995 due to higher wages in the public
sector, robust credit expansion to the private sector and the recent rise in
world commodity prices. The Consumer Price Index, therefore, could reach around
9% in 1995, up from 8.5% at the end of 1994.
ISRAEL
MARKET REVIEW
Although local investors continue to show little interest in the Tel Aviv Stock
Exchange, foreign investors have continued to invest in the blue-chip shares,
pushing the market up 0.35% since
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the Fund's inception and 0.6% during its fourth quarter. Israel's inclusion in
the Morgan Stanley index and the ongoing popularity of high-technology issues
have encouraged foreign investors to establish and build portfolio positions.
While the flow of mutual fund redemptions has finally slowed down, this
liquidation of financial assets will not easily be reversed since it has proved
one of the driving forces behind private consumption. Reported third quarter
earnings for most companies proved better than expected, and any currency
depreciation would boost profits substantially. Trading at a prospective P/E
ratio of 12.9 times 1995 earnings, we believe that at current valuation levels
the market offers substantial upside potential.
POLITICAL AND ECONOMIC REVIEW
Shortly after the Israeli parliament narrowly approved the Oslo II accord, a
right-wing Israeli gunman assassinated Prime Minister Rabin, creating enormous
anxiety about the future of the peace process. Thus far, the transition to a new
government under Shimon Peres has gone, in our opinion, quite smoothly, and the
Labour Party has surged ahead of Likud in public opinion polls. Israeli military
redeployment in the West Bank continues, and Prime Minister Rabin's funeral
service, televised in much of the region, appears to have generated sympathy for
Israel in the Arab world. Even Syria, which had sidetracked Golan negotiations
over the issue of early warning stations, has sent more positive signals to the
American intermediaries.
The Bank of Israel ended a series of interest rate cuts this autumn, based on
rising inflation and strong money supply growth. The CPI has jumped to 12.0% or
higher during the past three months, far higher than the 6% annualized rate
through August. Perhaps more importantly, M1 expanded 14.7% in the
January-August period. Although economic activity slowed late in the summer, the
Treasury still estimates GDP growth in excess of 6%.
Furthermore, Bank of Israel intervention and market rumors have taken the shekel
to its lowest level this year. Investors seem to be predicting that Peres will
push through substantial budget cuts, allowing lower interest rates and a
devaluation of the shekel. Although Peres has expressed optimism about such a
scenario, Finance Minister Shohat has sounded less sanguine, noting Army
requests for additional funding.
Significant private consumption has exacerbated the trade deficit, which widened
by 54% in September alone. At this pace, the deficit would reach $11 billion by
the end of 1995. After falling most of the summer, foreign currency reserves
once again reached $9 billion in September; the private sector has taken on
estimated $5 billion in foreign currency credit from Israeli banks.
MOROCCO
MARKET REVIEW
Despite the serious impact of the drought, the performance of the Casablanca
Stock Exchange ("CSE") has not reflected the overall economic downturn of the
market, increasing 4.2% since both the Fund's inception and during its fourth
quarter. Free float remains low due to family or institutional ownership
structures, and the ten largest capitalization companies continue to represent
most of the traded volume. The launch of the first Moroccan mutual funds
expected in December, however, should further tap domestic savings and increase
market liquidity. In total, twelve mutual funds (nine open-ended and three
closed-ended funds) have been approved.
Although not included on the original privatization list of 112 companies, at
least 20% of Samir, the largest oil refiner, and Sonasid, the steel company, are
expected to be listed on the CSE by the first quarter of 1996. Further
privatizations are envisioned in the financial services sector, including Banque
du Credit Populaire, Morocco's largest bank in terms of assets and number of
branches. Furthermore, the Government plans to present a law for the
privatization of the telecommunications sector near the end of 1996. The
Ministry of Privatization is planning to issue Privatization Bonds; which are
convertible bonds bearing a 9% interest rate. The bonds
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will be convertible during any public privatization offering. The bonds should
enable the Government to realize privatization revenues immediately and will
give investors pre-emptive rights over the remaining subscribers.
Meanwhile, the International Finance Corporation ("IFC") has indicated plans to
include Morocco in its index next year. Based on the above developments and an
expected rebound in corporate profits in 1996, we believe the CSE, currently
trading at a P/E multiple of 11.8 times prospective 1995 earnings, remains
relatively attractive.
POLITICAL AND ECONOMIC REVIEW
As Morocco experiences its worst drought in decades, economic recession has
heightened calls for political liberalization. Opposition parties are pressing
for more seats in parliament to be elected by universal suffrage, replacing the
current system under which a third of the representatives are indirectly
elected.
The Government has reached a new fishing accord with the EU, which will allow
mainly Spanish fishing vessels to return to Moroccan waters. More importantly,
this agreement paved the way for the initialling of a Moroccan-EU economic
accord, similar to that completed with Tunisia earlier this year. This accord
will lead to the establishment of a free-trade area in twelve years, with
customs tariffs being phased out over the period. Morocco will receive
approximately $500 million of aid from the EU over the 1996-1999 period.
We expect the drought will significantly impact the economy in 1995. Most GDP
estimates have been revised down to a contraction of 5%. Non-agricultural
sectors, however, are growing this year at approximately 3-4%. Provided rainfall
levels and the harvest return to normal in 1996, real GDP growth of around 8%
may be achieved. Meanwhile, consumer price inflation is anticipated to
accelerate past 1994's level of 5.1% as food and fuel prices rise to reach
around 8% in 1995.
TURKEY
MARKET REVIEW
The Turkish stock market ("ISE") gained 28.8% in US$ terms since the Fund's
inception but fell 21.5% during the Fund's fourth quarter. Third quarter results
for Turkish firms were generally strong; economic growth, combined with sharp
cost cutting and a reduction of real wages led to substantial increases in
after-tax earnings for listed firms. Net profit margins have benefited from the
resumption of domestic demand while exports continue to grow. The earnings
outlook for the fourth quarter remains quite promising. The country's
traditional pre-election spending, however, could lead to an overheating economy
in the run up to elections. Investor enthusiasm remains muted, and equity prices
face mounting pressure from real rates. If elections are held on December 24,
1995, pre-election spending will be limited to only two months while the
political uncertainty will fade. A sustainable rise in equity prices, however,
should not be expected until the formation of a new government and announcement
of its economic program. At present, the ISE is trading at 9.6 times projected
1995 earnings.
POLITICAL AND ECONOMIC REVIEW
In early October, the CHP's new chairman, Mr. Baykal, pulled his party out of
the four-year old governing coalition, thus throwing the Government into a
crisis. As a result, PM Ciller opened talks with ANAP, the main opposition
party, as well as some smaller parties for support. When these negotiations
failed, the governing coalition was reconstituted after reaching agreement on
public workers strikes, government employees' salary increases, certain
constitutional changes and anti-terrorism measures. The new coalition was
ratified in a vote of confidence held on November 5 and early elections have now
been agreed. While the date has been set for
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December 24, 1995, an appeal to the Constitutional Court may force a delay of
several months. Until then, the coalition can be expected to concentrate on
securing Turkey's admission into the EU customs union.
From an economic point of view, it is important that the elections are held as
early as possible, as the timing should dictate the pace and magnitude of the
populist policies as well as the manner in which they will be financed. All
performance criteria specified in the IMF stand-by agreement were met in the
first half of the year. The economy then began to boom toward the end of summer,
growing by 12% in the second quarter, and investors switched back into Turkish
lira assets. More importantly, industrial production rose 8% over the first nine
months. In response, interest rates were increased and the Central Bank
abandoned foreign currency purchases in order to limit monetary expansion,
decrease inflation and maintain exchange rates in line with IMF guidelines. The
Central Bank is expected to maintain middle-of-the-road monetary policies until
the elections.
If successfully implemented, the Government's economic policies should lead to
economic growth of 3%-4% in 1996. Unless the economy slows in the fourth
quarter, however, Turkey will begin the new year with substantial inflationary
momentum, which may put renewed pressure on share prices and interest rates;
year-end consumer price inflation could reach 90%. Meanwhile, major strides on
the privatization front in 1996 are unlikely; instead, we expect a continuation
of the piecemeal approach that has characterized the program this year.
LEBANON
MARKET REVIEW
After closing in 1983 at the height of the civil war, the Beirut Stock Exchange
("BSE") was inaugurated on September 25, 1995. Actual trading is expected to
begin during the first quarter of 1996. At one point, 46 stocks were quoted on
the BSE, one of which was foreign. Solidere, the property development company,
is currently the only stock trading on the secondary market, but other shares
listed on the BSE prior to 1983 are currently trading in the "grey" market.
The BSE will provide an important vehicle for Lebanese companies seeking to
raise capital. The success of the $650 million Solidere issue and the two
Eurobond issues has encouraged many firms to take this route. While Byblos Bank,
a family-owned institution, undertook a $11.6 million private placement of its
shares to the public, another major Lebanese bank, Bank Audi, undertook a $34
million Global Depositary Receipt ("GDR") issue, the first for an Arab country.
It was twice oversubscribed with 85% of the funds coming from Europe and the US.
When the BSE is operational again, the Lebanese authorities would like to see
Beirut become a regional stock market. Lebanon's close business connections with
Syria, coupled with the entrepreneurial culture and financial sophistication of
Lebanese businessmen, could provide attractive opportunities.
OMAN
MARKET REVIEW
Since the Fund's inception, the Muscat Securities Market ("MSM") has increased
0.8% in US$ terms and 0.3% during the Fund's fourth quarter. The link between
the MSM and the Bahrain Stock Exchange ("BSE") was finalized in March, and the
first Omani company to be listed on the BSE was the Oman Cement Company. The
successful linkage of two regional exchanges should add to the liquidity of the
markets and improve the efficiency of capital flows in the Gulf, making Gulf
shares more attractive to international investors. Meanwhile, two Gulf-based
institutions are launching funds that will invest the bulk of their capital in
the MSM. The establishment of these vehicles indicates a new trend in Omani
banking, and a large number of banks have applied for investment banking
licenses with the objective of diversifying their activities.
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The recent success of most new flotations has also encouraged investment in the
stock market. Currently trading at a P/E multiple of 9.5 times 1995 earnings,
the MSM is one of the more inexpensive markets in the Fund's universe. Based on
the improving macroeconomic fundamentals and the steady flow of liquidity into
the market, the MSM continues to offer attractive opportunities. Although the
Fund is currently unable to invest in Oman directly because custodial
arrangements do not meet US regulatory requirements, the Fund expects to invest
in Omani securities when such arrangements are established.
POLITICAL AND ECONOMIC REVIEW
Sultan Qaboos has emphasized that he does not consider a Western-style democracy
appropriate to Oman, but he does appear to favor a more liberal political
climate. Since the Sultan is still fairly young, he faces little pressure to
name a successor. The country was shaken, however, by the death in a car
accident of Qays al-Zawawi, the popular deputy prime minister for Finance &
Economic Affairs. While the policy of replacing expatriate workers with Omani
nationals, known as "Omanization", is expected to continue for both economic and
political reasons, the Government will, in our opinion, continue to face a major
challenge in its attempt to supplant foreign workers without affecting the
standards of services to which Omanis have become accustomed.
Oman responded to last year's fall in oil prices by raising its crude oil
production to approximately 860,000 barrels/day. The price outlook has
marginally improved for this year. As a result of these developments, Oman will,
in our opinion, experience real GDP growth this year for the first time since
1992. This growth, however, will probably be limited to just over 1%.
JORDAN
MARKET REVIEW
Investors are refraining from substantial equity activity on the regular market
due in part to an environment of tighter liquidity resulting from higher
interest rates and a record number of IPOs this year on the primary market.
Investors have also been cautiously monitoring the Arab-Israeli peace
negotiations and eagerly awaiting any sign of an end to sanctions on Iraq,
Jordan's largest trading partner. The Amman Financial Market ("AFM") rose 7.6%
in US$ terms since the Fund's inception and 2.5% during the Fund's fourth
quarter. The market's rise was led in part by a strong rise in the share price
of Arab Bank, which accounts for approximately 25% of the market's
capitalization.
Despite expectations, the market did not move up ahead of the Amman economic
summit and the passage of important investment and taxation laws, which are
expected to streamline the system and encourage new foreign investment. Trading
at a P/E multiple of 13 times prospective 1995 earnings, the AFM offers
investors an attractive opportunity.
POLITICAL AND ECONOMIC REVIEW
The Government has become increasingly focused on producing a peace dividend for
ordinary Jordanians, particularly in light of Prime Minister Rabin's
assassination. Parliament recently approved major new legislation which is
designed to make Jordan a more attractive place for foreign direct and portfolio
investment. An overhaul is being carried out on the income tax, labor and
investment laws, with the intention of reducing bureaucracy, increasing
transparency and fostering further liberalization of the economy. To bolster
foreign confidence and encourage local investors to keep their savings in
Jordanian dinars, the foreign exchange regime has been simplified by pegging the
currency to the US dollar.
The Government is now confidently predicting 1995 growth of approximately 6.4%,
more than 1% above IMF projections. During the second half of 1995, the
Telecommunications Corporation
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successfully tapped international capital markets by launching Jordan's first
Eurobond. Meanwhile, Jordan became the first Arab state to receive sovereign
credit and foreign currency debt ratings from Standards & Poor's and Moody's.
With inflation brought under control through high interest rates, CPI forecasts
for 1995 have been revised downward to 4.3% from 5%. Moreover, any boom on the
back of increased demand from Iraq, resulting from a partial lifting of
sanctions and higher oil sales, could add as much as 3% to Jordan's 1996 GDP
growth.
TUNISIA
MARKET REVIEW
The Tunisian stock market, La Bourse des Valeurs Mobiliers de Tunis ("BVM"),
rose 34.6% in US$ terms since the Fund's inception and 1.0% during the Fund's
fourth quarter. Share price gains slowed during the second half of the year
although huge demand continues to chase a limited number of stocks. The
structural reforms introduced in September should further increase activity on
the bourse throughout 1996; the measures include the removal of barriers to
foreign investment, a provision for the exchange to be run by traders, and the
establishment of a securities' watchdog. In an attempt to win more firms over to
the concept of raising capital via the market, founding shareholders will
receive guarantees that they can retain control of their companies should they
float their shares. Government estimates suggest that around 300 public and
private firms are eligible to enter the market.
Trading at a P/E of close to 23 times 1995 prospective earnings, the BVM is one
of the more expensive markets in the Fund's investment universe. Based on a
recent decree, foreign investment in listed companies will be permitted without
authorization as long as the total level of such investment does not exceed 10%.
Foreign investment in non-listed companies will meanwhile be permitted without
authorization up to a level of 30%. Although the Fund is currently unable to
invest in Tunisia because custodial arrangements do not meet US regulatory
requirements, the Fund expects to invest in Tunisian securities when such
arrangements are established.
POLITICAL AND ECONOMIC REVIEW
To preclude the instability that is convulsing neighboring Algeria, President
Ben Ali has reshuffled several key posts this year and reorganized the economic
departments of state. Tunisia also became the first Mediterranean non-member
country to sign a Euro-Mediterranean Association agreement with the EU. The
agreement, signed on July 17, calls for Tunisia to develop over 12 years, a free
trade zone with the EU, which in turn will assist Tunisia to modernize its
industry and improve its competitiveness.
Along with Morocco, Tunisia has suffered from the drought affecting the Maghreb
region. Given the poor cereals harvest expected this year, the Government has
now revised its real GDP growth forecast down to 4.0%. Expansion, however, is
expected to take place in most sectors of the economy, and faster growth in
Europe should help Tunisian exports. While a reasonably tight fiscal policy will
help to limit inflationary pressures, CPI in 1995 is still expected to be around
5.5%.
We continue to believe that investing in the Middle Eastern equity markets will
provide attractive long-term growth. We appreciate your interest in the Fund and
would be pleased to respond to your questions or comments.
Scott M. Delman Omar M. Masri
Portfolio Manger Portfolio Manger
The Foreign & Colonial The Foreign & Colonial
Emerging Middle East Fund, Emerging Middle East Fund,
Inc. Inc.
10
<PAGE>
Portfolio of Investments
October 31, 1995
- --------------------------------------------------------------------------------
EQUITY AND EQUITY EQUIVALENTS--93.29%
- --------------------------------------------------------------------------------
<TABLE><CAPTION>
SHARES VALUE
- ----------- ----------
EGYPT--20.72%
<C> <S> <C>
APPAREL & TEXTILES--1.42%
10,758 El Nasr Clothing & Textile Co. (KABO).................................. $ 534,893
----------
CHEMICALS--1.51%
3,000 Paints and Chemicals Ind. (PACIN)...................................... 569,285
----------
CONSTRUCTION--4.97%
41,473 Amreyah Cement......................................................... 638,750
49,230 Suez Cement............................................................ 611,935
45,980 Torah Cement........................................................... 626,865
----------
1,877,550
----------
FINANCIAL SERVICES--2.96%
7,330 Commercial International Bank (CIB).................................... 1,117,615
----------
FOOD & BEVERAGE--3.47%
41,125 Misr for Soft Drinks (MISROOB)......................................... 338,776
21,200 Misr Gulf Oil Proc. Co. (MIGOP) (a).................................... 402,295
33,865 North Cairo Flour Mills................................................ 568,003
----------
1,309,074
----------
HOTELS--0.62%
12,045 Misr for Hotels (Hilton)............................................... 233,883
----------
OIL & GAS--1.51%
32,200 Phoenix Resource Companies, Inc........................................ 571,550
----------
PHARMACEUTICALS--2.44%
25,200 Egyptian International Pharmaceuticals (EIPICO)........................ 921,183
----------
STEEL--1.82%
12,000 Alexandria National Iron & Steel (ANSDK)............................... 593,116
2,000 Alexandria National Iron & Steel (ANSDK) (a)........................... 94,000
----------
687,116
----------
7,822,149
----------
ISRAEL--22.94%
BANKING--1.63%
5,612 First International Bank............................................... 617,255
----------
CHEMICALS--2.22%
504,000 Israel Chemicals....................................................... 377,646
84,000 Makhteshim Chemical Works.............................................. 459,165
----------
836,811
----------
CONGLOMERATES--2.14%
11,630 The Israel Corporation................................................. 807,593
----------
ELECTRONICS--3.83%
3,808 Clal Elec. Ind......................................................... 427,874
12,975 Elco Holdings.......................................................... 544,141
45,000 Elron Electr Inds. Ltd.--ADR........................................... 472,500
----------
1,444,515
----------
ENGINEERING & CONSTRUCTION--3.31%
14,210 Koor Industries........................................................ 1,249,514
----------
FOOD & BEVERAGE--1.45%
86,823 Osem Investment Ltd. .................................................. 548,250
----------
OIL & GAS--1.04%
13,550 Delek Israel Fuel...................................................... 391,226
----------
REAL ESTATE & TOURISM--2.58%
799 Africa Israel Inv. .................................................... 976,199
----------
RETAIL TRADE--2.83%
53,523 Super Sol.............................................................. 1,068,163
----------
TELECOMMUNICATIONS--1.91%
38,000 ECI Telecom Ltd.--ADR.................................................. 722,000
----------
8,661,526
----------
</TABLE>
<PAGE>
<TABLE>
<C> <S>
LEBANON--4.22%
BANKING--2.04%
63,000 Banque Audi SAL--GDR................................................... 771,750
----------
REAL ESTATE--2.18%
6,450 Solidere-B Warrants (b)................................................ 822,375
----------
1,594,125
----------
</TABLE>
11
<PAGE>
<TABLE><CAPTION>
SHARES VALUE
- ----------- ----------
<C> <S> <C>
MOROCCO--22.70%
AUTOMOTIVE & TRUCKS--2.15%
2,350 Auto Hall.............................................................. $ 813,032
----------
BANKING--3.94%
16,708 Banque Commerciale du Maroc (BCM)...................................... 1,056,434
20,125 Credit Immobilier et Hotelier (CIH).................................... 432,166
----------
1,488,600
----------
CONGLOMERATES--3.60%
10,000 Omnium Nord Africain (ONA "A")......................................... 402,043
24,000 Omnium Nord Africain (ONA "B")......................................... 958,507
----------
1,360,550
----------
CONSTRUCTION--2.18%
22,034 Cimenterie de l'Oriental (CIOR)........................................ 822,772
----------
ELECTRICAL EQUIPMENT--1.88%
7,189 Alcatel Alsthom CGE Maroc.............................................. 707,562
----------
FINANCIAL SERVICES--1.69%
13,687 Credit Eqdom........................................................... 636,817
----------
FOOD & BEVERAGE--1.23%
5,000 Brasseries du Maroc (BDM).............................................. 462,289
----------
INVESTMENT COMPANIES--4.43%
22,000 Financiere Diwan (a)................................................... 603,660
17,950 Societe Nationale d'Investissement (SNI)............................... 1,068,580
----------
1,672,240
----------
TRUCKING & FREIGHT--1.60%
16,355 Cie de Transport du Maroc (CTM-LN)..................................... 604,859
----------
8,568,721
----------
OMAN--2.04%
INVESTMENT COMPANIES--2.04%
87,000 Oryx Fund.............................................................. 772,125
----------
TURKEY--20.67%
APPAREL & TEXTILES--1.42%
1,722,798 Aksa................................................................... 537,063
----------
BANKING--1.39%
2,000,000 Akbank................................................................. 526,059
----------
CHEMICALS--1.81%
910,000 Petkim................................................................. 682,611
----------
CONGLOMERATES--1.19%
2,250,000 Koc Holding............................................................ 449,342
----------
CONSTRUCTION--9.97%
1,199,000 Alarko Holding......................................................... 467,219
1,100,000 Alarko Sanayi.......................................................... 482,221
1,030,000 Cimentas............................................................... 622,114
4,330,000 Eczacibasi Yapi (EYAP)................................................. 514,622
2,000,000 Ege Seramik............................................................ 691,671
6,825,600 Trakya Cam............................................................. 984,110
----------
3,761,957
----------
FOOD & BEVERAGE--1.70%
3,060,000 Guney Biracilik........................................................ 640,916
----------
PACKAGING & CONTAINERS--1.57%
3,273,000 Tire Kutsan............................................................ 593,062
----------
TELECOMMUNICATIONS--1.62%
1,770,000 Netas.................................................................. 612,129
----------
7,803,139
----------
TOTAL EQUITY AND EQUITY EQUIVALENTS (cost $34,640,712).............................. 35,221,785
----------
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
TREASURY BILL--2.76%
- --------------------------------------------------------------------------------
<TABLE><CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
- ---------- -----------
<C> <S> <C>
EGP 3,550 Egyptian Treasury Bill
Zero Coupon, 11/23/95 (cost $1,038,409)................................ $ 1,041,361
-----------
</TABLE>
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT--4.97%
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
US$1,877 Repurchase Agreement with State Street Bank and Trust Company,
4.50% dated 10/31/95 to be repurchased 11/01/95 in the amount
of $1,877,235 collateralized by $1,265,000 U.S. Treasury Bond, 12.00%
due 8/15/13 (cost $1,877,000).......................................... 1,877,000
-----------
TOTAL INVESTMENTS (cost $37,556,121)--101.02%...................................... 38,140,146
Liabilities in excess of other assets--(1.02)%..................................... (384,252)
-----------
NET ASSETS (applicable to 2,807,169 shares; equivalent to
$13.45 per share)--100.00%........................................................ $37,755,894
===========
</TABLE>
- ------------
(a) Fair valued security, aggregating $1,099,955 or 2.91% of net assets.
(b) Non-income producing security.
ADR American Depositary Receipt.
GDR Global Depositary Receipt.
See accompanying notes to financial statements
13
<PAGE>
Statement of Assets and Liabilities
<TABLE><CAPTION>
OCTOBER 31, 1995
----------------
<S> <C>
ASSETS
Investments in securities, at value (cost $37,556,121)...................... $ 38,140,146
Cash (including foreign currency of $699,617 with a cost of $743,152)....... 700,202
Dividends and interest receivable........................................... 74,127
Deferred organizational expenses............................................ 297,256
Prepaid expenses............................................................ 34,041
----------------
Total assets........................................................... 39,245,772
----------------
LIABILITIES
Payable for securities purchased............................................ 1,149,713
Investment advisory fee payable............................................. 40,023
Administration fee payable.................................................. 7,644
Accrued expenses and other liabilities...................................... 292,498
----------------
Total liabilities...................................................... 1,489,878
----------------
NET ASSETS
Common stock, $0.001 par value; 2,807,169 shares issued and outstanding
(100,000,000 shares authorized)........................................... 2,807
Additional paid-in capital.................................................. 37,504,936
Net realized loss on investments............................................ (295,001)
Net unrealized appreciation of investments and other assets
and liabilities denominated in foreign currency........................... 543,152
----------------
Net assets applicable to shares outstanding............................ $ 37,755,894
================
NET ASSET VALUE PER SHARE................................................... $13.45
=====
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
Statement of Operations
<TABLE><CAPTION>
FOR THE PERIOD
NOVEMBER 4, 1994*
THROUGH
OCTOBER 31, 1995
-----------------
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $36,675).................. $ 638,478
Interest................................................................. 550,223
--------------
1,188,701
--------------
EXPENSES
Investment advisory fees................................................. 475,315
Custody and accounting fees.............................................. 193,343
Legal and audit fees..................................................... 134,880
Administration fees...................................................... 123,973
Directors' fees and expenses............................................. 76,149
Amortization of organizational expenses.................................. 72,744
Reports and notices to shareholders...................................... 51,654
Transfer agent fees and expenses......................................... 15,902
Other expenses........................................................... 37,793
--------------
Total expenses........................................................... 1,181,753
Less: Fee waivers........................................................ (44,094)
--------------
Net expenses............................................................. 1,137,659
--------------
Net investment income.................................................... 51,042
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on:
Investments............................................................. (295,001)
Foreign currency transactions........................................... (399,835)
Net unrealized appreciation (depreciation) of:
Investments............................................................. 584,025
Other assets and liabilities denominated in foreign currency............ (40,873)
--------------
Net realized and unrealized loss on investments
and foreign currency transactions...................................... (151,684)
--------------
NET DECREASE IN NET ASSETS FROM INVESTMENT OPERATIONS.................... $ (100,642)
==============
</TABLE>
Statement of Changes in Net Assets
<TABLE><CAPTION>
FOR THE PERIOD
NOVEMBER 4, 1994*
THROUGH
OCTOBER 31, 1995
-----------------
<S> <C>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income.................................................... $ 51,042
Net realized loss on investments and foreign currency
transactions.......................................................... (694,836)
Net unrealized appreciation of investments and other assets
and liabilities denominated in foreign currency....................... 543,152
--------------
Total from investment operations......................................... (100,642)
--------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares of common stock............................. 39,310,000
Offering costs charged to additional paid-in capital..................... (1,553,472)
--------------
Total capital share transactions......................................... 37,756,528
--------------
Net increase in net assets............................................... 37,655,886
NET ASSETS
Beginning of period...................................................... 100,008
--------------
End of period............................................................ $37,755,894
==============
</TABLE>
* Commencement of operations
See accompanying notes to financial statements
15
<PAGE>
Notes to Financial Statements
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Foreign & Colonial Emerging Middle East Fund, Inc. (the "Fund") was
incorporated in the State of Maryland on July 29, 1994, as a non-diversified,
closed-end management investment company. Prior to commencing operations on
November 4, 1994, the Fund had no operations other than the sale to Foreign &
Colonial Emerging Markets Limited (the "Investment Adviser") of 7,169 shares of
common stock for $100,008 on October 25, 1994. Organizational costs of $370,000
have been deferred and are being amortized on a straight-line basis over a
60-month period from the date the Fund commenced operations.
The following is a summary of significant accounting policies followed by the
Fund.
Valuation of Investments--Portfolio securities for which market quotations are
readily available are valued at the last sale price prior to the time of
determination if there was a sale on the date of determination or, if there was
no sale on such day, at the mean between the last current bid and asked prices,
or if there was no asked price, the bid price. Securities for which reliable
market quotations or pricing services are not readily available are valued in
good faith at fair value using methods determined in good faith by, or under
procedures established by the Fund's Board of Directors. Investments in
short-term debt securities having a maturity of 60 days or less are valued at
amortized cost, which approximates market value, or by amortizing their value on
the 61st day prior to maturity if their term to maturity from the date of
purchase is greater than 60 days.
Repurchase Agreements--The Fund's custodian takes possession of the collateral
pledged for investments in repurchase aggreements. The underlying collateral is
valued daily on a mark-to-market basis to assure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, the Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized gains and losses from investments and foreign currency
transactions are determined on the identified cost basis. Interest income is
recorded on the accrual basis. Dividend income and other distributions are
recorded on the ex-dividend date, except for certain dividends which are
recorded as soon after the ex-dividend date as the Fund becomes aware of such
dividends.
Foreign Currency Translation--The books and records of the Fund are maintained
in U.S. dollars as follows: (1) the foreign currency market value of investment
securities and other assets and liabilities denominated in a foreign currency
are translated at the prevailing rates of exchange on the valuation date and (2)
purchases and sales of investment securities, income and expenses are translated
at the rate of exchange prevailing on the respective dates of such transactions.
The resulting net foreign currency gains or losses are included in the Statement
of Operations.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the end of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Accordingly, such net unrealized
foreign currency gain (loss) is included in net realized and unrealized gain
(loss) on investments. However, the Fund does isolate the effect of fluctuations
in foreign currency rates when determining the gain or loss upon the sale or
maturity of foreign currency denominated debt obligations pursuant to U.S.
federal income tax regulations.
Net foreign currency gain (loss) from valuing foreign currency denominated
assets and liabilities at period end exchange rates are reflected as a component
of net unrealized appreciation of investments and other assets and liabilities
denominated in foreign currency.
16
<PAGE>
Net realized foreign currency losses of $399,835 represent foreign currency
gains and losses from holdings of foreign currencies, sales and maturities of
foreign debt securities, transactions in foreign currencies, currency gains or
losses realized between the trade and settlement dates on security transactions,
and the difference between the amounts of interest and dividends recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid.
Dividends and Distributions--Dividends and distributions to shareholders are
recorded on the ex-dividend date. The amount of dividends and distributions from
net investment income and net realized capital gains are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. These "book/tax" differences are either
considered temporary or permanent in nature. To the extent these differences are
permanent in nature, such amounts are reclassified within the capital accounts
based on their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income and net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
additional paid-in capital. Net realized foreign currency losses of $399,835
were reclassified to accumulated net investment loss. As a result of this
permanent book/tax difference, $348,793 has been reclassified to additional
paid-in capital. Net assets were not affected by this reclassification.
U.S Federal Income Taxes--The Fund intends to distribute all of its taxable
income and to comply with the other requirements of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies. Accordingly, no
provision for U.S. federal income taxes is required. In addition, by
distributing during each calendar year substantially all of its net investment
income, capital gains and certain other amounts, if any, the Fund intends not to
be subject to a U.S. federal excise tax. Withholding taxes on foreign interest
and dividends have been provided for in accordance with the applicable tax
requirements.
At October 31, 1995, the Fund had a capital loss carryforward of $295,001
available as a reduction, to the extent provided in the regulations, of any
future net capital gains realized prior to the end of fiscal year 2003. To the
extent that these losses are used to offset future capital gains, such gains
will not be distributed to shareholders.
Foreign Taxes--The Fund may be subject to certain taxes on dividends, capital
gains and other income imposed by the foreign countries in which it invests.
NOTE 2 INVESTMENT ADVISER AND ADMINISTRATOR
The Investment Adviser provides investment advisory services to the Fund under
the terms of an Investment Advisory Agreement. As compensation for its services
to the Fund, the Investment Adviser is paid a monthly fee at the annual rate of
1.25% of the value of the Fund's average weekly net assets. For the period ended
October 31, 1995, the Investment Adviser waived $7,902 of its fees.
Mitchell Hutchins Asset Management Inc. (the "Administrator"), a wholly-owned
subsidiary of PaineWebber Incorporated ("PaineWebber"), provides administrative
services to the Fund under an Administration Agreement. As compensation for its
services, the Administrator is paid a monthly fee at the annual rate of 0.15% of
the value of the Fund's average weekly net assets, subject to a minimum annual
fee of $125,000. For the period ended October 31, 1995, the Administrator waived
$36,192 of its fees.
NOTE 3 INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at October
31, 1995 was the same as the cost of securities for financial statement
purposes. Accordingly, net unrealized appreciation of investments of $584,025
was composed of gross appreciation of $2,701,355 for
17
<PAGE>
those investments having an excess of value over cost, and gross depreciation of
$2,117,330 for those investments having an excess of cost over value.
For the period ended October 31, 1995, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $40,046,888 and
$5,111,175, respectively.
NOTE 4 TRANSACTIONS WITH AFFILIATES
PaineWebber, an affiliate of the Administrator, participated in the underwriting
group as one of the managers in the offering of the Fund's common stock.
PaineWebber informed the Fund that it received $198,355 in underwriting and
management fees and $162,658 in selling concessions for the sale of 361,300
shares.
NOTE 5 CONCENTRATION OF RISK
Investment in Middle East issuers involve certain risks and special
considerations which are not typically associated with investing in securities
issued by U.S. or Western European companies or governments, as a result of,
among others, the possibility of future political and economic developments and
the level of governmental supervision and regulation of the security markets. In
particular, securities markets and currencies of many Middle East countries,
similar to those of other emerging market countries, have been subject to
substantial price volatility and sudden market declines. The ability of the
issuers of the debt securities held by the Fund to meet their obligations may be
affected by economic and political developements in a specific industry or
region.
NOTE 6 CAPITAL STOCK
Transactions in common stock were as follows:
<TABLE><CAPTION>
FOR THE PERIOD
NOVEMBER 4, 1994*
THROUGH
OCTOBER 31, 1995
------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Net shares/proceeds from initial public offering................... 2,800,000 $39,310,000
Offering costs charged to additional paid-in capital............... -- (1,553,472)
--------- -----------
2,800,000 $37,756,528
========= ===========
</TABLE>
* Commencement of operations.
At October 31, 1995, International Finance Corporation owned 500,000 shares of
the Fund.
NOTE 7 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE><CAPTION>
NET REALIZED NET INCREASE
AND UNREALIZED (DECREASE) IN
GAIN (LOSS) ON NET ASSETS
NET INVESTMENTS AND FROM
INVESTMENT FOREIGN CURRENCY INVESTMENT MARKET PRICE
INCOME (LOSS) TRANSACTIONS OPERATIONS ON NYSE
-------------- ---------------- ---------------- ------------------
TOTAL PER TOTAL PER TOTAL PER
QUARTER ENDED (000) SHARE (000) SHARE (000) SHARE HIGH LOW
- ------------------------------ ----- ----- ------- ----- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 31, 1995.............. $ 142 $ .05 $(1,184) $(.42) $(1,042) $(.37) $13.125 $11.000
July 31, 1995................. (78) (.02) (349) (.13) (427) (.15) 12.875 10.875
April 30, 1995................ (50) (.02) 2,451 .87 2,401 .85 13.250 9.750
January 31, 1995*............. 37 .01 (1,070) (.38) (1,033) (.37) 15.000 12.000
----- ----- ------- ----- ------- -----
Totals....................... $ 51 $ .02 $ (152) $(.06) $ (101) $(.04)
===== ===== ======= ===== ======= =====
</TABLE>
* For the period November 4, 1994 (commencement of operations) through January
31, 1995.
18
<PAGE>
Financial Highlights
Selected data for a share of common stock outstanding throughout the period is
presented below.
<TABLE><CAPTION>
FOR THE PERIOD
NOVEMBER 4, 1994*
THROUGH
OCTOBER 31, 1995
-----------------
<S> <C>
Net asset value, beginning of period................................. $ 14.04**
-------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income................................................ .02
Net realized and unrealized loss on investments and
foreign currency transactions...................................... (.06)
-------
Total from investment operations.............................. (.04)
-------
CAPITAL SHARE TRANSACTIONS
Offering costs charged to additional paid-in capital................. (0.55)
-------
Net asset value, end of period....................................... $ 13.45
=======
Market value, end of period.......................................... $ 11.00
=======
TOTAL INVESTMENT RETURN (a)(b)....................................... (21.65)%
=======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted).............................. $37,756
Ratio of expenses to average net assets.............................. 2.99%+#
Ratio of net investment income to average net assets................. 0.13%+#
Portfolio turnover................................................... 19%
</TABLE>
NOTES:
<TABLE>
<S> <C>
* Commencement of operations
** Initial public offering price of $15.00 per share less an average
underwriting discount of
$0.96 per share.
+ Annualized
# The Investment Adviser and Adminstrator waived a portion of their fees
during the period. If such waivers had not been made, the ratio of
expenses to average net assets would have been 3.11% and the ratio of
net investment income to average net assets would have been 0.01%.
(a) Total investment return is calculated assuming a purchase of common
stock at the current market price on the first day, and a sale at the
current market price on the last day of the period reported. Dividends
and distributions, if any, are assumed, for purposes of this
calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total investment return does not reflect
sales charges or brokerage commissions.
(b) Total investment return is not annualized.
</TABLE>
19
<PAGE>
Report of the Independent Accountants
To the Shareholders and Board of Directors of
The Foreign & Colonial Emerging Middle East Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Foreign & Colonial Emerging
Middle East Fund, Inc. (the "Fund") at October 31, 1995, the results of its
operations, the changes in its net assets and the financial highlights for the
period November 4, 1994 (commencement of operations) through October 31, 1995,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian and brokers provides a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 12, 1995
20
<PAGE>
Corporate Information
DIRECTORS
Audley W. Twiston Davies, Chairman and President
Bassam Aburdene
Albert Francke, III
Walter M. Noel, Jr.
Fred Arthur Rank Packard
David C. Patterson
OFFICERS
Audley W. Twiston Davies Chairman and President
Arnab Banerji Executive Vice President
Scott Delman Vice President
Omar Masri Vice President
Michael Gabriel Treasurer and Secretary
INVESTMENT ADVISER
Foreign & Colonial Emerging Markets Limited
Exchange House, 8th Floor
Primrose Street
London, England EC2A 2NY
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
NYSE symbol "EME"
This report is sent to the shareholders of the Fund for their information. It is
not a prospectus, circular or representation intended for use in the purchase or
sale of shares of the Fund or of any securities mentioned in this report.
<PAGE>
The Foreign & Colonial Emerging Middle East Fund, Inc.
1285 Avenue of the Americas
New York, NY 10019
Telephone: 212-713-2848
Fax: 212-713-4058
Foreign & Colonial Emerging Markets Limited
Exchange House, 8th Floor
Primrose Street
London, England EC2A 2NY
Telephone: 44-171-628-1234
Fax: 44-171-628-2281
[LOGO]
Foreign & Colonial Emerging Markets Limited
