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BLOG: What does the Scottish referendum mean for investors?

Shaun Port
Written By:
Shaun Port

With the Scottish independence referendum fast approaching, the media is abuzz with questions around what this will mean for UK businesses, for Europe and for the integrity of the United Kingdom.

The vast majority of experts and commentators are expecting the vote to be ‘no’, and that Scotland will remain part of the United Kingdom. However, with the potential for the result to be quite close, Nutmeg takes a look at what effect the vote could have, either way, on your investments.

An exodus south?

Let’s start with the money. Many of the UKs biggest finance companies and fund managers, for example Aberdeen Asset Management, are headquartered in Scotland. Standard Life, one of the UK’s largest insurers, is also headquartered north of the border and a “yes” vote could cause problems for customers, the majority of whom live elsewhere in the UK.

A number of these companies have intimated that they may move their operations south to England as for many customers the possibility of extra tax considerations brought in by a new Scottish government may prove to be one step too far.

Who pays?

There are a number of other risks arising from the independence vote which could have adverse consequences. For example – how does the UK debt get divided up? A major example of this is RBS, Scotland’s biggest bank, which is currently 80 per cent owned by the UK taxpayer – because we taxpayers had to bail out the bank when it got into financial trouble.

Politicians are non-committal about how the responsibility for this debt would be handled. Indeed the financial consequences for an independent Scotland must not be underestimated, the credit agency Standard and Poors has already hinted that it does not believe Scotland would have the necessary funds to prop up, or worse, bail out its banks in the event of another crisis.

A further thing that makes the split complicated is the huge oil and gas industry in Scotland. With over 3,000 companies involved in the oil and gas supply chain, based all over the UK, potential changes to the regulatory or political landscape could have an effect on oil prices. There are other questions to be settled over the revenues from oil – Scottish ‘yes’ campaigners suggest that Scotland should keep all or most of the oil revenues, whilst the UK government insists that oil revenues are in steady decline and cannot be relied upon to support Scotland’s future development. Interestingly the Scottish Liberal Democrats are also in agreement with this view.

What should we do as investors?

Stock markets hate uncertainty, and this vote is creating lots of uncertainty; we simply don’t know what would happen in the (unlikely) event of a yes vote. As we near the referendum this uncertainty will cause market volatility and we expect a sharp fall in the event of a shock ‘yes’ vote.

The majority of political commentators and financial analysts are not expecting a ‘yes’ vote and market prices currently reflect that. So anyone wanting to protect their investment portfolio from such an eventuality might need to adopt some relatively bold positions.

First of all, you may want to consider reducing your Sterling exposure and hold assets in US dollars. This can be done by buying US stocks, and provides protection given that sterling would likely weaken. The euro may also suffer as the likelihood of a UK exit from the European Union would increase without Scotland.
If you do stick with the UK you should look to hold larger company stocks over mid-size and small companies, as large companies tend to be more global and therefore protected from a weaker sterling.

And you’d be wise to favour bonds that have a short date to maturity – i.e. a low duration – as bond yields would be likely to rise, which means their capital value decreases.

Here at Nutmeg, we expect the vote to be no and we’re managing our customers’ portfolios in accordance with that expectation, however we are keeping a close eye on developments and are ready to adjust our client portfolios accordingly.

Shaun Port is chief investment officer at Nutmeg.