Market relief as Scotland votes No to independence
Stockmarkets had bet on Scottish voters rejecting independence so any rally is likely to be muted
As the dust settles following the Scottish referendum on independence held on 18 September, in which the country decided to retain the 307-year-old union with England and Wales by a margin of 55 per cent to 45 per cent, wealth and asset managers are taking stock of what all this could mean for markets.
The weeks running up to the vote had been full of speculation about just what a Yes vote would have meant not only for the UK, but markets in general. “If Scotland had voted 'yes', then many were predicting this could have been the 'butterfly flapping its wings in the Amazon jungle' that led to the long-awaited crash in equity markets and rise in volatility that has been curiously absent over the course of this summer,” said Nick Beecroft, senior market analyst at Saxo Bank.
Questions about the currency, where leading Scottish banks would be headquartered, the UK’s role in Nato and the EU and the possible precedent for other regions such as Catalonia to seek similar settlements have all been put to bed, at least for the time being.
“In the financial markets there will be collective sigh of relief as a period of huge uncertainty has been avoided,” said Alan Wide, head of global fixed income at Baring asset management. “This will calm markets, which had become increasingly nervous in the last few weeks.”
Although there was some financial disruption as the vote approached – for example global investors pulled more than $1bn (€780m) from UK equity funds in the week before the Scotland poll according to EPFR – UK share prices showed little fear factor. Investors decided early on in the campaign that there would be a No victory, said Bill O’Neil, head of investment office UK at UBS Wealth Management, and confidence had return to markets before the vote was held. “There will be a relief rally, but it will be limited because the market has not aggressively accounted for a Yes vote,” he added.
UBS expect any rebound to be muted and short-lived and remain underweight UK equities. The UK index is highly international, generating more than 75 per cent of revenues from abroad, and a strong pound works against this.
Indeed the currency took much of the pressure ahead of the poll, and a recovery to $1.65 or so seems plausible, said Mr Wilde at Barings.
Some sectors should reap the benefit as the situation returns to normal, said Paul Stephany, UK equity portfolio manager at Newton Investment Management. “Oil companies like BP and those that service them like Wood Group can now concentrate on their day jobs rather than contingency plans, with clarity over tax regimes critical to getting the most out of what’s left in the North Sea. The financials sector should also benefit as worries recede. For example, the share prices of Standard Life and Lloyds are likely to experience a bounce.”
The political uncertainty is not about to disappear despite the No’s clear victory. In the last weeks of campaigning, with opinion polls narrowing as the vote approached, all of the momentum appeared to be with the Yes side, led by Alex Salmond of the Scottish National Party. In a last-ditch attempt to avoid defeat, the leaders of the UK’s three main political parties all agreed to devolve more powers to Scotland if it remained within the union, with former prime minister Gordon Brown promising that these would be implemented soon after the referendum.
But almost as soon as the result was announced the cross-party consensus started to unravel. The Conservatives announced that English MPs needed to have a greater say in how their country was run and this is the perfect opportunity, while Labour, fearful of losing the influence of their 41 Scottish MPs on English-only matters, saw this as political trap.
A broader UK constitutional settlement has not been resolved and that could yet cause uncertainty
“A broader UK constitutional settlement has not been resolved and that could yet cause uncertainty,” warns Andrew Wickham, head of UK and global fixed income at Insight Investment. He holds a modest negative view on UK gilts as he believes markets are not fully pricing in a rate hiking cycle that is set to begin next year.
Meanwhile some asset managers are now turning their attention to another referendum which could bring uncertainty on a far greater scale, namely the one David Cameron, the prime minster, has promised to hold on the future of the UK’s EU membership should his Conservative party win the 2015 general election.
“The analysis and contingency planning undertaken by financial companies ahead of the [Scottish] independence vote is arguably a timely dress rehearsal ahead of a potential UK-wide referendum on EU membership,” Martin Gilbert, chief executive of Aberdeen Asset Management, Europe’s largest fund house, told FTfm. An in-out vote would affect banks, insurers and asset managers throughout the UK, he said.
The build up to a vote on EU membership could be very destabilising for the fund industry if opinion polls were close, Dominic Johnson, chief executive of Somerset Capital, the London-based fund house, said to FTfm. “The uncertainty from the Scottish referendum would be multiplied by five,” he said.
