Scottish independence – what now for markets?

Scottish voteToday Scotland votes in a referendum to determine whether it will separate from the rest of the United Kingdom and become an independent nation. Recent polls suggest that the outcome will be close. YouGov's election eve poll placed the "No" campaign four points ahead at 52% in a survey of 3,237 electors, the largest sample of any referendum poll, but many voters are still undecided. James Klempster and Scott Gordon, analysts at Momentum Global Investment Management, foresee increased volatility in the event of a "Yes" vote but are not expecting a "chronic shock" to the UK market. In a research note, they write: "We would not be surprised to see greater volatility in the UK stock market and something of a sell-off in the short term. "Ultimately, however, there are few companies in the UK stock market that are totally reliant on business in Scotland. As a result, overdone fears in the short term would be an event that we would consider carefully as a potential buying opportunity." Klempster and Gordon see the prospect of Scotland joining the euro as "untenable" and say that continuing with sterling with some support from the Bank of England (BoE) is the likely outcome, particularly as the majority of people in Scotland wish to keep the pound. However, they add that opposition from the Westminster parties and BoE governor, Mark Carney, towards a currency union between the Scotland and the rest of the UK could be a stumbling block, and raise concerns in international markets. "In a world where Scotland retains an informal currency relationship with the UK, one key issue of sovereignty will ultimately remain with London; namely that the BoE will set interest rate policy to suit the rest of the UK and as a result Scotland will have its interest rate dictated by an external party." Viktor Nossek, head of research at exchange-traded product provider Boost ETP, says: "Even assuming Scotland secedes without major repercussions from its currency choice, the risks to the rest of the UK's financial markets remain. Independence would provoke calls from other regions, both inside the UK and elsewhere in Europe, for more autonomy, loosening the relationship with central governments. "Such calls may grow more fractious against the backdrop of fragile coalition governments torn between more austerity and more stimulus, and the rise of more extremist parties that seek to exploit the status quo." Boost ETP also warns that factors such as exposure to unwarranted credit risks and an increased risk of Britain exiting the EU may mean UK equities risk being de-rated. Nossek, says: "Until clarity emerges well after the vote on Thursday 18 September, it may be prudent for investors to hedge their exposure to UK debt and equities." Martin Arnold, director of global forex exchange at ETF Securities, which manages $18.8 billion (€14.5 billion) in global investor assets, comments on the impact for the pound of the impending decision. He says: "The british pound has recovered from the 10-month lows reached last week as recent opinion polls suggest that supporters of Scotland remaining part of the UK have gained ground. "GBP trading is likely to remain volatile. Periods of rising volatility have historically been a negative for the value of the pound and we see no reason for this trend to change." He adds: "While we expect GBP to rebound if the 'No' campaign against independence wins out, we feel that this would present an opportunity to sell into such rally and we remain bearish on the pound against the USD." Arnold expects the British currency to fall sharply if the 'yes' campaign wins. ©2014 funds europe

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