Baron International Growth Fund: Latest Insights and Commentary

The somewhat volatile quarter for international equities was marked by uncertainty around President Trump’s policy agenda, while the principal catalyst driving capital markets was a change in consensus thinking regarding a U.S. foreign policy pivot and the role of U.S. tariffs. Midway through the quarter, an abrupt end to U.S. support for Ukraine’s defense suggesting a new era of U.S. isolationism galvanized European unity, as long-term resistance to fiscal expansion withered. The result was a historic commitment to defense and infrastructure spending, which elevated European growth expectations and launched related European equities higher. As the quarter progressed, hopes that U.S. immigration and tax reform priorities would dominate the agenda began to fade, as foreign policy isolationism and economic protectionism moved to center stage. Protectionist rhetoric that had been rationalized as negotiating leverage exerted by a transactional president increasingly became viewed as a means to an end, with the likely economic impact higher inflation and lower growth than expected, at least in the near term.

We believe the market reaction to Trump’s “Liberation Day” tariffs was unfortunately appropriate, and suggests that, contrary to the spin, the U.S. is actually the disproportionate beneficiary of the status quo global trade and security equilibrium. Early in the second quarter, the jury is still out on whether the Trump administration pivots back to a more transactional posture, but concerns are growing that the U.S. is signaling an exit from the established rules-based global trade and security compact in place since the aftermath of WWII. Should the paradigm of economic nationalism and foreign policy isolationism gain momentum and take hold, we believe such a new world order would initially elevate equity risk premium, and it could take considerable time to establish a new equilibrium. The silver lining for international investors is that, if such a paradigm shift were to take place, we would likely see a further re-pricing in favor of non-dollar assets.

Current U.S. economic and trade policy is turning economic orthodoxy on its head.  While the U.S dishonors this orthodoxy, capital is migrating offshore. Rather than the protector of global security and democracy, free trade and free markets, the U.S. has become a source of disruption with an agenda to unwind decades of disinflation and capital efficiency. While the U.S. Congress may yet reclaim its mandate over U.S. trade and tariff policy and slow the protectionist momentum, to some extent, and in the eyes of our trading and geopolitical allies, the genie is out of the bottle. We believe the extremity of U.S. protectionism and its foreign policy pivot represent the catalyst that will turn the tide of international equity underperformance.

CONTRIBUTORS

• BNP Paribas S.A. is a France-based global bank. Shares appreciated alongside the broader index of European banks as a result of a newly positive outlook for the region’s growth and interest rates. The Trump administration's approach to the Ukraine-Russia conflict and its critical stance toward NATO have spurred the EU to boost defense spending. The resulting increase in fiscal expenditures has put upward pressure on short and long-term EU rates, which is a positive for bank revenue. We believe we will see further EU integration and increased pressure to complete the long-awaited Capital Markets Union (CMU) given the growing need for more efficient capital markets to support funding for these defense and infrastructure projects. BNP Paribas is well placed to capture the benefits of the CMU thanks to its full-fledged pan-European financial services franchise, strong capital markets capabilities, and strong franchise in the defense industry.
• Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. Alibaba operates shopping platforms Taobao and Tmall, as well as businesses in logistics, local services, digital media, and cloud. Shares were up this quarter, as the company announced investment and progress in generative AI, and core domestic commerce growth accelerated. Alibaba is ramping its capital expenditures over the next three years to build out its cloud infrastructure layer and add AI capabilities to existing apps (e.g., consumer search). Within its commerce business, the core market is showing positive signs of stabilization, and improved profitability should follow. We retain conviction that Alibaba is well positioned to benefit from China's ongoing growth in e-commerce and cloud, although competitive concerns remain.
• Agnico Eagle Mines Limited is a senior Canadian gold mining company with operations in Canada, Australia, Mexico, and Finland. Shares contributed on the back of an approximate 20% increase in gold prices as a result of economic uncertainty related to Trump's tariff policies. Agnico Eagle has a leading position in some of the world’s best gold mining jurisdictions from both a political and geological perspective.We also like the upside potential of its Canadian portfolio and its track record of value creation via capital allocation and technical mining expertise. We are positive on gold prices and expect improvement in Agnico Eagle's cash costs.

 

DETRACTORS

• Waga Energy SA offers innovative technological solutions to reduce methane emissions by converting landfill gas into cost-competitive and grid-compliant renewable natural gas (RNG), a substitute for fossil natural gas. The Trump administration's hostility toward renewable energy pressured shares, as Waga has significant exposure to renewable gas projects in the U.S. We remain investors. Waga’s patented proprietary technology, WAGABOX®, which can capture RNG from almost any landfill, is a major competitive advantage. Industry experts forecast a 36% average annual increase in the consumption of RNG in the EU by 2030 based on stated government policies there. The company has 28 installed WAGABOXes and contracts for 11 more, for combined fixed-price sales of 100 million EUR annually. In addition, it has a pipeline of projects for 165 more sites.
• Trent Limited is a leading retailer in India that sells private label apparel direct-to-consumer through its proprietary network. Shares were down this quarter on lower-than-expected quarterly sales due to soft consumer spending in India combined with some store upgrades and consolidations. We remain shareholders, as we believe the company will generate over 25% revenue growth in the near to medium term, driven by same-store-sales growth and outlet expansion. In addition, we believe operating leverage and a growing franchisee mix will lead to better profitability and return on capital, driving more than 30% EBITDA CAGR over the next three to five years.
• Kaynes Technology India Limited is a leading electronics manufacturing service (EMS) player in India, offering services across the automotive, industrial, railway, medical, and aerospace and defense industries. Shares were down this quarter due to lower-than-expected quarterly sales, as execution on a subset of industrial-related orders was temporarily delayed. We retain conviction in Kaynes Technology, as we believe it is well positioned to benefit from the government's Make in India initiative, which encourages domestic manufacturing of electronic components by providing attractive tax subsidies and manufacturing infrastructure. We are excited about the company's decision to set up an Outsourced Semiconductor Assembly and Test facility, which we believe represents significant incremental growth opportunity in the medium term. We expect the company to deliver over 30% compounded EBITDA growth over the next three to five years.