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06 October 2014

As Scotland returns to business after the referendum, what can investors expect from this new era for Caledonia?

The United Kingdom has survived the referendum on Scotland’s independence, although the old union may be about to be reshaped for the 21st century. Britain, with the party political conference season out of the way, can now focus on the general election in 2015. Certainly, the concessions offered by Westminster to devolve extra powers for Scotland, as well as strike a new constitutional settlement for the UK, have raised questions that are yet to be answered. But the immediate uncertainty over the future of Scotland has been calmed. There has been no flight of money or business from Scotland. Britain remains a single market and nation with a shared currency.

Investors have largely expressed relief in the aftermath of the ‘No’ victory. But, despite the high drama of the closing weeks of the referendum, markets had remained largely confident that a ‘No’ vote was a given. The possibility of secession had little impact on prices until one poll in the fortnight before the vote suggested a narrow ‘Yes’ lead. There were some outflows of global capital from UK equities, but the consensus is that this was short term and reversible. Markets priced in some of the risk of a ‘Yes’ vote, but quickly made up the ground on news of the pro-union victory.

More immediately, companies with exposure to Scotland were among the biggest risers in the aftermath of the vote, particularly in the financial services, defence and utilities sector. Royal Bank of Scotland and Lloyds – which owns the Bank of Scotland – gained, as did Edinburgh-based life insurer Standard Life and defence contractor Babcock. Stocks involved in the North Sea should also benefit from the removal of the need for contingency plans, including BP and oil services specialist Wood Group.

Meanwhile, the pound rallied and gilt yields dropped, as the news broke on 19 September. (Spanish government bond yields eased too, as Madrid braced itself for an unofficial independence referendum in Catalonia in November.)

In the near term, the ‘No’ victory should mean that interest rates remain on track to rise in the first quarter of 2015. Previously, there were concerns that the Bank of England, in the event of an independence victory, would have deferred these rises until after the General Election.

The pro-union victory will improve the outlook for the UK economy through the reduction of the immediate uncertainties that surrounded a split up of the union, although there may be a short-term impact on economic data in August and September. “We are now more likely to get a [rate] rise in February,” said European economist Azad Zanagana of fund manager Schroders.

Democracy could spell further trouble ahead for the UK, however, despite the recent relief and afterglow in the markets over the survival of the union. There are a series of profound uncertainties on the UK’s political horizon, from the detail of a new-look union – and how this will influence the UK general election – to the response of our European partners and their own electorate to the region’s deep economic challenges, as well as a British referendum on membership of the European Union. Specifically, devolution could lead to changes to investment or saving rules and practices, as well as tax and pension regimes, too.

Fund manager Neil Woodford, manager of the St. James’s Place UK High Income fund, has argued that, although the impact of further devolution in the UK may be preferable to an independent Scotland, investors should not expect an easy transition to the new UK.

The founder of Woodford Investment Management believes new constitutional developments could have considerable economic ramifications.

“Inevitably, this uncertainty will have a dampening effect on consumer sentiment, business confidence and investment intentions,” says Woodford. “It is prudent to start preparing our investors for a period of extraordinary economic and political uncertainty here in the UK.”

Fund manager AXA Framlington’s chief economist Eric Chaney also raises the concern that uncertainty could deter investment in the UK, weigh on sterling and add to market volatility. Political uncertainty looks like it will be a more prominent feature of markets in the wake of the Scottish referendum and in the UK over the next few years; the old union has been preserved, but a return to ‘business as usual’, for now, looks unlikely.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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