While at this point it seems likely that the worst-case, crash-out Brexit scenario will be avoided, we remain watchful that a disappointment in the political process—not an unreasonable expectation given recent history—could shift sentiment on short notice. If the separation date is extended significantly, many of the alternate scenarios being discussed lean toward a softer Brexit; however, an economically disruptive crash out at some point would remain a real possibility. Also, the uncertainty inherent in an extended delay is an impediment to growth, and volatility in the currency, equity performance and bond yields may be the norm until a long-term resolution can be reached.
That said, Brexit-related headwinds are just one of the factors that lead us to believe equity index returns are likely to be less robust in the period ahead than they were through most of the last 10 years. We think active management is particularly vital in a more complicated market environment such as the one we expect. In sideways-moving or slowly rising markets, active managers may become more valuable to the extent that they can distinguish stronger stocks from weaker ones. In falling markets, active managers that focus on reducing risks may be able to help insulate investors against the full force of a downturn while also potentially taking advantage of opportunities to buy what appear to be attractive stocks at discounted prices.
In many ways, Brexit is a microcosm of a worldwide challenge: While globalization has reduced inequality among countries over the years, it has increased inequality within them. The UK and others have reacted to this condition by abandoning the traditional political route in favor of an untested path, and it will be many years before we know if this was the right decision. In the meantime, rather than try to anticipate the fluctuations of the markets and the global economy, we will continue to focus on building portfolios designed to be resilient in the face of turbulence.
Market participants are on edge as investors weigh global trade disputes, political insurgency in Europe, of course, and diverging global central bank policy. Matthew McLennan, head of the Global Value Team and First Eagle Investment Management says we're getting into dangerous territory.
Idanna is a senior sovereign analyst on the Global Value team responsible for sovereign debt and FX. She joined First Eagle in September 2015. Prior to joining First Eagle, Idanna spent over 15 years at the Federal Reserve Bank of New York, most recently as the deputy head of the Global Economic Analysis Department. Idanna also was a sovereign analyst at Brown Brothers Harriman for four years. Idanna earned BSc and BA degrees in business and international relations from the Wharton School and the University of Pennsylvania, respectively, and a PhD in economics from the University of Washington.
Camille is a sovereign research analyst on the Global Value team. She joined First Eagle in September 2018. Previously, she worked at the Federal Reserve Board in Washington, DC, where she was a lead financial analyst concentrating on euro-area banking policies and resolution regimes. Prior to the Board, she was a sovereign analyst at the Federal Reserve Bank of New York from 2008 to 2014 and a project coordinator at the World Bank Institute from 2006 to 2008. Camille received her undergraduate degree in international relations from Brown University and her MA in international economics from Johns Hopkins School for Advanced International Studies (SAIS).
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