Review and Outlook

as of 03/31/24

Illustrating the inherent reflexivity of liquidity and credit and economic expectations, early 2024 witnessed a notable uptick in growth and inflation expectations by investors as well as the pushing out of anticipated Federal Reserve easing. While global equities extended the bull run that started in early November, strength was concentrated in the U.S., Japan, mega-caps, and semiconductor and other AI proxies, while emerging markets and small-cap equities lagged as global central bank easing expectations moderated and the U.S. dollar firmed.

The shifting conditions we are witnessing present an interesting setup for non-U.S. equities. We have consistently remarked that the global response to COVID was disproportionate, with U.S. fiscal expansion and monetary support orders of magnitude larger than that of most non-U.S. jurisdictions. This, in turn, led to a stronger recovery and greater inflation pressure in the U.S., which largely remains today. In contrast, we believe conditions in most non-U.S. jurisdictions warrant substantially more easing than the U.S. While the Fed is poised to remain “higher for a bit longer,” many non-U.S. central banks already appear too tight today. An easing cycle would likely trigger a more urgent re-evaluation of improving non-U.S. earnings prospects by global investors and allocators. Markets sensitive to interest rates such as Latin America (particularly Brazil), India, and Southeast Asia should be disproportionate beneficiaries. We believe our portfolio is well positioned, given our overweight positions in India and Brazil, and our structural and thematic bias towards rate-sensitive domestic consumer, financial, and industrial leaders.

We are encouraged that many companies, most notably Taiwan Semiconductor Manufacturing Company Limited, Samsung Electronics Co., Ltd., and SK hynix Inc., are increasingly recognized as key beneficiaries of the AI phenomenon. These three stocks, all of which are prominent positions in the portfolio, alone comprise over 13% of the MSCI Emerging Markets Index, and we are researching several additional candidates. India, our largest overweight country exposure, continues to deliver world-leading economic and earnings growth while offering a longer-term geopolitical dividend and presents a multitude of exciting investment opportunities notwithstanding high relative valuations. Korea has embarked on an early-stage, shareholder-focused initiative resembling the highly successful campaign in Japan, and we believe this initiative could offer new investment candidates in this statistically cheap jurisdiction. Finally, after a weak start to the year given ongoing questions regarding growth momentum, China’s economy and equity markets are exhibiting signs of stabilization and improvement, largely in response to policymakers’ stepped-up efforts to restore consumer, business, and investor confidence. We maintain cautious optimism, noting that any signs of improving growth should trigger significant equity appreciation given widespread skepticism and depressed valuations in China.

Top Contributors/Detractors to Performance

as of 03/31/24

Contributors

  • Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited contributed in the first quarter due to investor expectations for a continued strong cyclical recovery in semiconductors and significant incremental demand for artificial intelligence chips. We retain conviction that Taiwan Semiconductor’s technological leadership, pricing power, and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT, will allow the company to sustain strong double-digit earnings growth over the next several years.
  • Bundl Technologies Private Limited is the parent entity of Swiggy, India’s leading food delivery platform with a market share of roughly 45%. Shares of Bundl were up during the quarter, driven by increasing penetration of food delivery in India and improving profitability of the company. We retain conviction as we believe India’s food delivery industry is still in its infancy and will continue to scale over the next several years, driven by a growing middle class, rising disposable income, higher smartphone penetration, and a structural shift in consumer preference to a tech-savvy younger population.
  • Nu Holdings Ltd. is a digital bank with operations in Brazil, Mexico, and Colombia. Shares appreciated during the quarter, as the company reported strong balance sheet growth and continued improvement in profitability. Initiatives to deploy new products and accelerate growth in new geographies are yielding strong results, leading to enhanced earnings expectations. Nu also benefited from news that its shares had become eligible for inclusion in the MSCI Brazil index, which drove technical flows into the name. We remain investors. Nu is disrupting the financial services industry in Latin America via its digital distribution and intense focus on user experience, which has allowed it to reach over 90 million registered users (almost half of the Brazilian adult population) in less than 10 years with little marketing investment. We believe its superior product offering will allow it to take share from incumbents in this massive market.

Detractors

  • Pine Labs Pte. Ltd. is a leading merchant commerce solutions provider in India with a network of more than a million point-of-service checkout points across more than 520,000 merchants. Share price weakness was driven by a marked slowdown in Pine Labs’ Buy Now Pay Later (BNPL) business momentum. While we are disappointed with recent developments, we remain investors, as we believe merchant digitization/BNPL in India is still in its infancy and will be a high-growth sector over the next decade (and beyond), driven by accelerating digital payments adoption and growing consumption/disposable income by a tech-savvy and aspirational Indian population.
  • HDFC Bank Limited is India’s largest and most prominent private-sector bank. Shares declined after the company reported results that showed slowing deposit growth due to competition and overall tight liquidity conditions. The company will likely have to curtail the pace of asset growth or increase funding costs to attract more deposits in the near term as a result. We think this headwind is temporary. We believe the size and scope of HDFC Bank’s distribution network is a competitive advantage that will allow it to grow its funding base at a faster pace than the industry over the long term. We retain conviction in HDFC Bank as one of the best ways to invest in the underpenetrated market for retail lending in India.
  • Zai Lab Limited is a Chinese biotechnology company dedicated to bringing Western medicines to greater China and to transitioning to a fully integrated company with internal drug development capabilities. While performance as a business has been excellent, shares fell on issues related to investing in China, most recently highlighted by a bill pending in Congress that would prohibit federal agencies from contracting with China's BGI Group, MGI, Complete Genomics, WuXi AppTec, their subsidiaries, and other biotechnology companies of concern. From a valuation standpoint, we think the shares are cheap, but it is unclear if anyone will reward this class of investment, given the U.S. government's efforts to curb profitability. Zai Lab is under review in the context of the portfolio's exposure to China as an investable market.

Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing.

The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.

Risks:All investments are subject to risk and may lose value.

The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The index performance is not fund performance; one cannot invest directly into an index.