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as of 03/31/19
Our year-end 2018 review and outlook proved prescient as we posited that, in the near term, a rally in global equities was more likely than a further decline, as markets begin to anticipate a de-escalation of protectionist measures and improving global trading conditions as well as a more flexible Fed mandate. We also suggested that, should the outlook for trade policy reduce pressure on China and Fed policy shift to a more accommodative stance, many of our investments offered material upside from levels at that time. During this year’s first quarter, many of the most impaired equities and currencies staged impressive recoveries as the above catalysts materialized much as we had anticipated, though most remain well below their highs. We view the recent reversal as largely justified, as policy and economic tail risks have de-escalated and China has incrementally introduced targeted stimulus measures and broad reforms.
While we are increasingly confident that we are at or near an inflection point in market leadership where emerging market and currencies can begin a period of sustained outperformance, we are less confident in the near-term outlook for the U.S. economy, corporate earnings, and equities. While global equities have repriced to reflect declining policy tail risks and now discount forward Fed rate cuts, we suspect the Fed’s shift to neutral also suggests rising risks to the U.S. economy and corporate earnings, and believe capital markets may need to retest lower levels to coax the Fed into full-scale easing mode. In our view, China’s increasingly aggressive response to weak domestic conditions suggests a bottom and enhanced forward-looking earnings, while U.S. corporate earnings expectations are moving through a peaking process. The U.S. equity market has outperformed its international peers on the strength of domestic consumption, fiscal stimulus, and tax-incented investment, and we believe we are likely entering a period where the waning of such effects will lead to a mean reversion in equity performance.
Regarding the outlook for the international markets, we believe the near-term resolution of at least a portion of Brexit uncertainty would be a welcome catalyst for U.K. as well as European equity markets, as valuation discounts in many cases are extreme and economic expectations remain quite low. While we agree with consensus that earnings growth in such markets will likely remain uninspiring in the near-term, for these markets the larger question is whether this outlook is more than discounted in the price. We believe that in general, the developed international markets favor bottom-up stock selection-based strategies such as ours, where active managers can identify companies, entrepreneurs, and themes with attractive value creation potential in a low macroeconomic growth environment, thereby driving outperformance. In short, while we would not be surprised by, and perhaps expect, some near-term retracement of recent gains, we also believe we are likely entering a significant phase of international equity outperformance.
as of 03/31/19
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.