A Fork in the Road for Europe: Investing Post-Brexit

1 minute with the CIO
The Brexit vote adds uncertainty in an already challenging environment. Over the short-term we believe that Central Banks are ready to act, but their credibility could be put under scrutiny. Europe stands at a turning point: more fragmentation vs higher political integration. The current market dislocation may create opportunities for active managers.
1 minute with the CIO

Brexit is Not Lehman
The Brexit vote caught most people by surprise and now opens a new period of uncertainty for the future of the European Union. From an economic perspective, the long Brexit process may increase the probability of recession for both Europe and the UK. But we do not believe we are facing a new "Lehman event".

Focus on Central Banks
We believe that the Central Bank activity of supporting financial assets through massive injections of cash and with zero/negative interest rates could be prolonged. However, markets may question the efficacy of additional monetary policy, putting the credibility of Central Banks' action under scrutiny.

A Fork in the road
We think the Brexit outcome reflects more a vote of discontent than a vote against Europe per se. To deal with this, some points of the populist agenda, such as a rise in taxation of corporations and protectionism, could be taken into account. In our opinion, this could lead to lower growth and corporate profits, while what Europe needs most are more pro-growth fiscal policies.

Investment Implications
We expect lower returns on equities while on fixed income Central Banks' monetary policies could drive a larger part of the bond universe into negative/zero yield territory. For the future, risk aware active managers may have an edge over passive in a world where most of the returns could come from alpha.

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