Baron International Growth Fund (BIGFX)
Review and Outlook
International equities declined in the third quarter in response to diminishing growth prospects, widening credit spreads, and a broad increase in risk premium. In our view, a key catalyst was a volatile progression of policy moves in China; first a failed attempt to stabilize the local A Share equity markets, and subsequently a modest, but meaningful, devaluation of the RMB. Such measures resulted in rising uncertainty over economic and financial stability and political leadership in China, an undisputed driver of global investment and growth over the past decade.
The other major catalyst of market activity was the shifting anticipation over a rate hike by the U.S. Federal Reserve. Although expectations of such an event have been pushed out for now, a significant tightening of conditions has been priced into the high-yield and emerging market sovereign bond markets. While we believe we have progressed into late stages of the current market correction, we note that such tightening conditions have increased the likelihood of a related credit event, which in our view could mark the “ninth inning” and perhaps set up a solid reversal. Also worth noting on the positive side, immediate concerns over a Greek insolvency and Euro exit faded as a referendum resulted in a pro-Euro parliamentary majority.
What is the way forward from here? To answer we must first analyze the root cause. We believe the headwinds international markets face today stem largely from aggressive quantitative easing by developed world central banks in recent years. After the 2008 financial crisis, U.S. QE led to a decline in global interest rates and expectations for sustained dollar weakness. As the U.S. economy slowly healed, the Fed passed the monetary baton to Japan and the ECB. This easing in Japan and Europe in the context of Fed tapering represented a tightening elsewhere, particularly in China, whose competitive position is directly impacted as the RMB remains largely pegged to the dollar. We were not entirely surprised by China’s depreciation of the RMB; we see no reason to expect China to unilaterally absorb the deflationary pressure resulting from a rising dollar as its neighbors devalue.
We see three possible scenarios for international markets in the near term. First, the global economic indicators could sustainably improve of their own accord in response to months of developed world easing in the pipeline. We suggest this is possible but unlikely. Second, China could engage in aggressive stimulus and/or devalue materially – also possible but unlikely given recent official statements. Third, the Fed could indefinitely defer rate hikes and perhaps even signal possible further easing, an outcome we would tend to expect if the market-based tightening referenced above were to result in a credit event. We believe any of the above could create an important bottom in global markets, and would likely trigger a reversal in the relative performance of hard hit asset classes such as energy, commodities, cyclicals, and the emerging markets.
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Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2015 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 advise to any person and are subject to chage 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. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund 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 PA2.0 Performance Analytics Software.
Source: FactSet PA