Somerset Capital targeting “once-in-a-generation” EM opportunities

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Somerset Capital Management, the global emerging markets specialist manager, is building positions in Brazil and South Africa in a “once-in-a-generation” opportunity for EM stocks following the recent global market downturn.

The USD7.1 billion manager – which has a particular focus on small- and mid-cap companies in Latin America and EMEA – is eyeing a sweeping range of opportunities following the dramatic sell-off, adding that “the challenge is picking the best place to invest.”

“Market dislocations of this magnitude happen rarely, perhaps once or twice in a generation, and have historically provided excellent entry points for investors,” said Mark Asquith, lead manager of the Somerset EM Small Cap and Somerset EM Discovery Funds.

Lat-Am and EMEA small and mid-cap companies were already historically cheap before sliding a further 30 per cent following the coronavirus impact, he observed.

“History has shown us that super normal returns can be made during this type of environment,” he said in a commentary on Tuesday, noting Brazil has tumbled even further, closer to 50 per cent.

The firm has recently taken positions in Hapvida, a Brazilian integrated medical insurer and hospital operator; Advantech, a global industrial PC manufacturer; and South African pharmacy chain Clicks.

Christopher White, co-manager of the Somerset EM Discovery Fund, added the portfolio has “held up well” despite its overweight positioning in Latin America and EMEA, which have been harder hit in the sell-off than Asia, where the Fund is underweight.

He observed that Lat-Am and EMEA assets were relatively cheap prior to the sell-off, and have since undergone sizable currency adjustments, making them well-placed to outperform in any future recovery.

“While the stocks in the fund are now cheap, the quality of the underlying businesses is excellent, with a return on capital of 17% and no net debt on average,” White said.

Asquith noted that in the 12 months following the 2008 global financial crisis, emerging market small caps rose more than 150 per cent, with Brazilian small caps surging around 300 per cent during the same period and some 500 per cent within two years.

“Given the continued uncertainty, it is clearly not out of the question for markets to sell off further from here but even accounting for this, on any reasonable time horizon we still see this as a very attractive entry point,” he added.

Established in 2007 with UK Conservative politician and Leader of the House Commons Jacob Rees-Mogg among its co-founders, Somerset Capital has offices in London and Singapore with USD7.1 billion in assets under management. Rees-Mogg left the firm last year.