Scotland.

8th September 2014

Ian Copelin, Investment Director, my wealth comments “The Scottish independence referendum has been the elephant in the room this year.  Markets have been paying too little attention to the referendum, largely because the ‘No’ campaign has been consistently ahead (even with a plausible margin for error), coupled with the fact that most attention has been focused on when interest rates will rise given the strengthening UK economy.  However, recent opinion polls suggest that Scotland could vote for independence next week.

Although this referendum is much more of a political rather than financial event, equity markets do not like uncertainty, hence recent weakness (having touched 6,900 last week for the first time since December 1999, the FTSE-100 has slipped back to below 6,800).

Whilst the international nature of the FTSE-100, should mean that the impact of a ‘Yes’ vote will be relatively limited, I would expect those companies with a large exposure to Scotland could underperform.  For example, both the Royal Bank of Scotland and Lloyds Bank (which owns the Bank of Scotland) have their HQ in Scotland and it is very likely that the Scottish economy will be too small to accommodate such large banks (Iceland is a prime example as it was too small to offer a state bailout of it failing banks during the credit crisis).  In addition both the Royal Bank of Scotland and Lloyds Bank have warned that Scottish independence would be a significant risk to their business in terms of funding, tax and compliance.  Other examples include Standard Life and SSE.

Despite this year’s recovery in the UK economy, we have kept our clients’ portfolio weighting neutral to the UK and have limited exposure to Scottish companies (Lloyds Bank and Aberdeen Asset Management being the main exceptions).

However, the main impact of a ‘Yes’ vote will be seen in the currency markets which this year has been responding more to speculation on the outlook for interest rates than to the Scottish vote.  Sterling could weaken, partly because of the uncertainty and partly because any interest rate rise in the UK would be pushed back even further (however, this could be positive for UK exporters which have been hurt by the strength in Sterling over the past 12 months).  UK gilts would probably weaken as well as it is not clear how a split in government debt would be practically achieved (GDP? Population?).  In addition, credit rating agencies have indicated that Scotland would have a lower credit rating than the UK, requiring a higher yield.

I believe that the bigger implication of a ‘Yes’ vote on the markets is the impact on a UK general election:  can next May’s election be postponed due to Scottish negotiations?  If not, if Labour return to power next year we may have to have a second election in 2016 following Scottish independence (24^th March 2016 has been declared independence day by Alex Salmond if the result of the vote is ‘Yes’), as they may only return to power due to their Scottish MPs which will disappear following independence (of the 59 Scottish constituencies, 41 are Labour and only 1 is Conservative).”