I have just returned from a fantastic two-week holiday in the US and, on my return, find that there is one issue that is dominating the airwaves: Scotland, and whether it is going to vote Yes or No to independence.
There seems to have been quite a change because, before I departed, the referendum was very much in the background, which I suspect is precisely where the London politicians wanted it. Their hope was that the motion would be quietly but convincingly defeated and that the issue could then be put to bed for at least a generation. But, as often seems to happen in referendums, the early favourite tends to campaign defensively thereby leaving the plucky underdog free to garner respect for positivity, integrity, and so on (voting Yes feels better than voting No.) Throw a charismatic and patriotic leader into the mix and suddenly the underdog is sitting atop a bandwagon.
There are two questions here, from my perspective:
- Would independence be better for Scotland and/or the rest of the UK?
- Would Scottish independence be a significant negative for investors in UK securities and, if so, should we do anything to prepare for it?
How should Scotland vote?
Whether independence is better for Scotland surely depends on the price in uncertainty that the Scots are prepared to pay to become an independent nation. Without being Scottish, this is impossible to know. But the uncertainty is considerable–for example, what the currency would be, whether membership of the EU would be available, whether the current level of expenditure will be sustainable as oil revenues fall and financial reserves need to be increased. For me, there are too many open questions to vote Yes, but I am not Scottish and so do not know how content or unhappy Scots are with their current status as part of the United Kingdom.
Would Scottish independence be better for the rest of the UK? Circumstantial evidence would suggest not, given how actively all of the political parties seem to be campaigning for the status quo. But how often do politicians seek to reduce their turf or sphere of influence? And, to be sure, a United Kingdom without Scotland would definitely have less influence on the world stage.
On the other hand, voters of a blue hue might well note the reduction in the number of Labour MPs that would be traipsing in and out of the House of Commons and Eurosceptics would also enjoy the relative increase in their influence. These groups might well rather fancy a UK with fewer European-minded socialists. Scotland at about 10% of UK GDP is also a relatively minor contributor to the UK economic engine.
Is independence a risk for investors in the UK?
As always, financial pundits love a scare story and the opinion and advice pages suddenly seem to be full of suggestions about potential risks that range from the apocalyptic to the amusing–for example:
- Currency
Experts seem to be predicting falls of 10-20% in the event of a Yes vote. - Europe
European leaders would not be keen to encourage separatists elsewhere by welcoming an independent Scotland into the fold. Meanwhile Eurosceptic influence at Westminster will increase raising questions about the rest of the UK’s future in the EU. - Capital flight
Uncertainty about the future of the huge Scottish banks and whether the B of E would stand behind them as lender of last resort might trigger capital flight. - Nuclear capability
How sustainable would this be for the rest of the UK after Scottish independence? - CEO Distraction
Inevitably, considerable operational and legal distractions would follow a Yes vote. - House prices
Zooplea and Rightmove are today suggesting the uncertainty that would follow a Yes vote would “jeopardise house prices across the UK”. - Political risk to Scottish companies from a new administration
I have added this after reading the following by Jim Sillars, former deputy leader of the SNP. He warned of a “day of reckoning” for those companies that had spoken up in favour of the union. “The heads of these companies are rich men, in cahoots with a rich English Tory Prime Minister, to keep Scotland’s poor poorer through lies and distortions.”
These are all specific risks but the single common thread is uncertainty. To me it looks very likely that there would be a prolonged period of uncertainty and resulting volatility that would follow a Yes vote as politicians wrangle over divorce proceedings.
Should investors do anything?
As always, the newspaper commentaries are not slow to offer advice to investors about what they should do to prepare for a Yes vote. The candidates include the following:
- Buy Gold
This is the old favourite and, apparently, sales of the stuff to Scottish investors have risen 42% in the past fortnight. - Ensure your holdings are diversified beyond Scottish-based companies
Common sense, this one. Scottish-based companies in the FTSE include: Weir, SSE, RBS, Aberdeen Asset Management, Stagecoach. There are also a lot of Scottish investment trusts, such as, Personal Assets Trust, Edinburgh Investment Trust and so on. - Sell British shares
Apparently Nutmeg, a firm that invests in tracker funds on behalf of British clients, has already sold its basket of British investments in favour of American investments.
I am not an expert or financial advisor, but I definitely will not be selling anything on the basis of an opinion poll or the potential for uncertainty. There is clearly a risk of a Yes vote and an ensuing period of volatility and possibly currency weakness that would follow, but I don’t think that I have the capacity to do anything sensible about that at this stage. Besides, currency strength was cited by several CEOs as being a major contributor to mediocre results in their last reports; perhaps a bit of currency weakness may be a positive for the Glaxos and Diageos in my portfolio?
I am sure that this situation will present an excellent trading opportunity for macro-oriented hedge funds and currency speculators, but for ISA-investors like me, I suspect that hasty last minute portfolio activity is a text book pitfall that can be easily avoided by, ahem, masterly indifference (doing nothing).
More likely than not (at least according to the latest polls), Scotland will vote No and this entire discussion will be irrelevant by this time next week.
Disclosure: Long GSK and DGE.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.