Baron Emerging Markets Fund (BEXFX)
Fund Manager since
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Baron Emerging Markets Fund invests primarily in growth companies in developing countries.
Review and Outlook
The first quarter or 2016 witnessed a sharp selloff and recovery across the emerging and global capital markets. We believe this market behavior reflects the fragility of confidence in forward-looking economic and financial conditions in an era of increasing policy intervention. The global markets have exhibited a high correlation, often reacting in unison to events in the U.S., Europe, Japan, and particularly China. We believe the interconnectedness of global markets is likely to remain high while global growth remains subpar and stimulative policy intervention in one jurisdiction often triggers unintended consequences in another.
While we were pleased to see the equity, credit and commodities markets strengthen through the end of the first quarter, we would prefer to see convincing evidence of underlying fundamental strength and an improvement in global imbalances rather than what appears to be ongoing aggressive monetary and fiscal policy tweaks. In our opinion, the most important such tweak was the shift in rhetoric suggesting the deferral of interest rate hikes by the U.S. Federal Reserve. The good news here is that if the Fed can deliver on recent communications, we are likely seeing a re-synchronization of global monetary policy, which would significantly reduce the short-term pressure on the Chinese currency, commodity prices, and the emerging markets. Indeed, the commodity and emerging markets took a leadership role in the rally which began in mid-February. In addition to the revised Fed communique, the European Central Bank, Bank of Japan and People’s Bank of China, as well as Chinese fiscal policymakers, all appeared to accelerate easing measures during the quarter. While measures of coincident and leading economic indicators have recently responded in kind with fairly broad-based improvement, it is difficult to distinguish cause and effect. Are improving economic indicators driving the rally in capital and commodities markets, or are policy-driven markets leading to improved economic indicators via the channels of rising confidence and recovering financial conditions? We believe that fundamental, lasting confidence in the global economy and global and emerging markets would be inspired by a successful normalization of interest rates, while confidence driven by ever more unconventional measures, such as the recently launched negative interest rate policies in Europe and Japan, will likely remain fragile.
We reiterate the view expressed last quarter that we are likely in the late stages of a relative and absolute bear market in the emerging markets, where much damage and currency adjustment has already occurred. We believe recent emerging market leadership confirms our view that a bottoming process is underway, and while we would not be surprised by a return of volatility later this year, we would likely view such an event as an opportunity to increase our exposure to high quality growth businesses in industries and countries where risk premium has been high and investor sentiment weak. We sense substantial investment opportunities ahead, and believe we are strategically and tactically prepared to take advantage.
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Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending March 31, 2016 is not yet available
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The prospective performance of the companies discussed herein is based on our internal analysis and reflect our opinions only. We cannot promise future returns and our opinions are a reflection of our best judgement at the time of publication. Our views are not intended as recommendations or investment advice to any person and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.
Source: FactSet PA.