After last week’s emphatic No vote in the referendum, logic would suggest that the investment funds that flew out of Scottish institutions in recent weeks would make a quick return.
But logic is by no means the sole determinant of markets. And investor sentiment seldom settles back into the familiar comfort of status quo ante. This is for one compelling reason: the resolution of one uncertainty only clears the ground for others.
According to Morningstar, Scotland’s six largest fund management companies suffered a net outflow of £113 million in the seven months to the end of July.
That figure is likely to have multiplied in the subsequent six weeks running up to last week’s vote.
Multrees Investor Services, which handles bank accounts for wealth management companies, said it had moved “hundreds of millions of pounds” on behalf of several wealth managers in the week before the poll.
Some of this money may indeed flow back – but I suspect by no means all. Investors now have to contend with two significant uncertainties.
The first is how the UK government will fare in honouring “the vow” of more tax-raising powers for Scotland and within a highly ambitious timetable. Scotland’s fractious constitutional debate now migrates to the whole of the UK – out of the Caledonian frying pan into a bigger fire.
Says John Stepek, in his MoneyWeek column, “The debate has stirred up a hornets’ nest of questions about the way Britain is run.”
Last-minute promises of devo-max may have saved the UK. But it also means, he warns, that Scotland may end up with “almost total control over revenue-raising and spending powers, and the reassurance of a bigger neighbour to bail it out if it over-reaches itself”.
The second big uncertainty is how the Scottish Parliament in due course will come to use its already enhanced tax-raising discretion and whether the pledge of new powers will encompass devolution of regulatory powers. Scottish investors and financial institutions in Scotland have cause to be apprehensive on both these fronts given the distinctly egalitarian, left-wing tone of the Yes campaign.
However, concerns are by no means confined to savers and investors north of the Border. One of the under- reported features of the “capital flight” story was the movement out of UK assets overall by global investors. According to EPFR Global, a US-based firm that tracks the flows and allocations of funds worldwide, outflows from UK equity funds – not just those domiciled in Scotland – exceeded $1 billion (£614m) in the seven days to last Wednesday, the largest weekly outflow since EPFR’s tracking began in 2001. Similar exodus has been reported by others.
Both the pound and benchmark UK ten-year government bonds were hit during the final weeks of the referendum campaign – and the so-called “relief rally” on Friday morning was notably more muted than most commentators had expected.
In fact, the rally soon ran out of steam, leaving the benchmark FTSE 100 Index less than 0.3 per cent up on the day, while the pound traded fractionally lower.
Investor focus will inevitably snap back to two familiar but worrying concerns: how robust the economic upturn will prove given the likelihood of a rise in interest rates that the market has factored in for November; and the continuing commitments to lowering the UK’s debt and deficit.
The fact that the interest charge on the UK’s colossal debt pile this year alone will hit £53bn is a sobering reminder of the huge constraints with which any new government will have to contend.
The lessons for investors are threefold. First, make sure money put aside for long-term investment and pension saving is well diversified, both by asset type and geographical location. Funds and trust in the global growth sector offer the best means to obtain geographical diversification.
Second, keep investment objectives focused on the long term: constant chopping and changing in response to short-term political uncertainties will defray savings through charges and costs.
And third, continue to keep a proportion of savings in cash or short-term deposit. In volatile periods this helps to cushion the downswings suffered by equity and bond markets. It also means there is ammunition in hand to take advantage of buying opportunities that will almost certainly open up in the year ahead.
And it gives the comfort of having ready cash in hand to meet unanticipated cash calls and emergencies.