Scottish referendum: 'yes or no, the world has changed'

Published by Rebecca Jones on 18 September 2014.
Last updated on 18 September 2014

Scots vs Brits

As Scotland heads for the polls, market pundits have warned of complacency among the investment community as both the UK and Scottish economies are likely to suffer regardless of the result.

With three days to go until the Scottish referendum, opinion remains split as to which way Scotland's populace will vote after a YouGov survey released last week showed the 'yes' campaign was in the lead for the first time.

Despite the issue attracting a great deal more media attention, however, Kevin Doran, chief investment officer of private bank Brown Shipley, has argued that the "investment community" remains unprepared for the result.

Doran claims little consideration has been given to the effect a 'yes' vote could have on tax revenues as the UK and Scottish governments are likely to enter in a 'bidding war of rebates, incentives and tax breaks', leading to credit rating downgrades and higher borrowing costs.

Will companies take flight anyway?

"It is this feature of a 'yes' vote that most aptly displays the market's current nonchalance towards the subject; a market pushing gilt yields to near historic lows; a market unconcerned about the UK's credit rating; a market apathetic to a Scottish credit rating of perhaps 'A+' at best and the consequent impact on all Scotland-based institutions now under a lower sovereign ceiling.

"For an industry whose role in society is to correctly price for risk, investors are in danger of ploughing on with the devolution question firmly in their blind spot," says Doran.

However, Doran also warns that even if the 'no' campaign succeeds companies and capital may begin embarking south of the border regardless in a bid to flee any future referendums and subsequent instability.

As an example he cites the experience of Quebec in 1995, when a closely contested independence vote saw a swathe of organisations remove themselves from future uncertainty by emigrating to Canadian territory, costing the French-speaking regions jobs and associated taxes.

In a blog post released on Monday, star fund manager Neil Woodford also voiced his concerns over the future of the UK economy after the referendum, regardless of a 'yes' or 'no' vote.

While Woodford claims that the latter would be arguably better for short-term stability, a new agreement between the Scottish and UK parliaments - dubbed 'Devo Max' - would still need to hammered out should the 'no' campaign win, leading to long-term instability.

"I believe that it is now probable that we are about to witness the fragmentation of governance within the United Kingdom - effectively, the federalisation of the UK regardless of who wins on Thursday.

"Clearly, this is profoundly important from a social and political perspective but, as a fund manager, I am also concerned about the considerable economic ramifications," says Woodford.

The manager believes that a "new dynamic of complexity and uncertainty" is already reflected in a weaker pound and will "inevitably have a dampening effect on consumer sentiment, business confidence and investment intentions".

Hold fire

"Putting the 'yay' and 'nay' arguments together, regardless of the result, the world has changed," says Doran.

"It will be important for investors to take account of these changes and plan for them within portfolios. There shall be winners and losers resulting from the reallocation of capital, labour and wealth - it's just a matter of identifying them," he says.

Exactly what investors should do, however, remains uncertain. Most are advising calm, with even Woodford claiming that he has no plans to re-jig his portfolio as ultimately, he is confident in the "long-term potential" of his holdings.

According to David Jane, manager of Miton's Multi Asset Funds, equity investors should not be overly concerned.

"We think the implications for equity markets in general, and for particular companies, are greatly overstated. For the most part, British-listed companies are very familiar with operating on an international basis, and while various companies have said they may move their head office to London, this is very different from moving their operations to London," he says.

Tom Stevenson, investment director of personal investing at Fidelity, agrees with Jane, adding that at the moment, investors should remain seated as the 18-month handover period outlined by the Scottish National Party would allow ample time to make any necessary adjustments to their portfolios.

"The rational decision for investors perhaps is to persist with their existing strategies, at least until the outlook becomes clearer. The time it might take to establish an independent Scotland or a new Scottish currency would likely allow investors ample time to transfer savings and investments to alternative providers should they need or wish to," says Stevenson.

On the flip side of the argument, investment trust broker Winterflood Securities claimed last week that a 'yes' vote could create buying opportunities within a number of Scotland registered global investment trusts.

"It seems reasonable to assume that some investors will be minded to restrict or cease active investment in Scottish domiciled investment trusts in the event of a 'yes' vote until there is greater certainty over the legal and tax environment.

"That being the case, these funds could see their discounts widen. We would regard this as a buying opportunity on the basis that any short term fears would be negated by a change in domicile or the implementation of a favourable regime by a newly independent Scottish government," says the broker.

This article was written for our sister website Money Observer

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