Jeff Salway: impact of independence on the markets

Picture: PA
Picture: PA
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Investors have been told to brace for a short period of volatility if Scotland votes in favour of independence later this month.

Shares in Scottish firms could be hit and volatility will hit currency markets too if the 18 September referendum goes the way of the Scottish Government. That’s the warning from investment pundits who say that regardless of the long-term implications of independence, there will be an adverse reaction from global and domestic investors in the immediate wake of a Yes vote.

They spoke out after polls published earlier this week showing a surge of support for independence set nerves jangling in currency and investment markets.

Royal Bank of Scotland, Lloyds Banking Group and Scottish & Southern Energy were among the companies whose share prices fell, while sterling was hit as investors sought to hedge against a fall in the pound should Scotland opt to go it alone.

A vote for independence could have a “significant” impact on investors, and not only in relation to Scottish companies, predicted Sheridan Admans, investment research manager at The Share Centre.

“The markets would be concerned about a potentially long period of uncertainty as the Scottish Government negotiates with Westminster over key issues,” he said.

“Concern about the disruption and distraction caused by such moves, allied to a probable economic impact to both Scotland and the remaining parts of the UK, would lead to volatility in both the stock market and the level of sterling.”

Markets may also react unfavourably to a close vote in favour of the union, he added.

The biggest issue, according to Admans, would be the uncertainty over the currency to be used by an independent Scotland and the amount of UK debt to be assumed – if any.

Uncertainty over the intentions of banks and insurers operating in Scotland may also have an impact.

“We haven’t downgraded any Scottish companies in anticipation of a Yes vote, but we do suspect that major financial groups such as RBS, Standard Life, Aberdeen Asset Management and Lloyds Banking Group would move their headquarters to London and that others with major operations in Scotland, such as Aviva, may consider relocating,” said Admans.

Ratings agency Standard & Poor’s (S&P) warned last month that a vote for independence would prompt a review of insurance company ratings in particular.

It said those firms would take a hit from an increase in costs and complexities that would arise from a divergence of tax and regulation. “Insurers with discrete Scottish subsidiaries would feel the greatest rating impact from a Yes vote,” the S&P statement said.

Shares in oil, defence, transport, utilities and property firms could also be hit by a Yes vote, a Barclays equity research report suggested in July.

Companies that could experience an adverse share price reaction include RBS, Lloyds, Standard Life, Wood Group, SSE, Weir Group and Aggreko, according to the analysis.

However, some firms would benefit and the negative impact on the UK stock market would be modest, said the report.

Even in the event of short-term volatility there should be no cause for panic among investors. John Blowers, of investment platform Trustnet Direct, said investors whose portfolios were diversified had no reason to be concerned about the outcome in the short-term.

‘Those living north of the Border will obviously have some decisions to make should the Yes campaign win, but this isn’t a case of capital controls coming in overnight should the nationalist campaign succeed.’

And Alan Steel, chairman of Alan Steel Asset Management in Linlithgow, pointed out that negative investor reactions are often counter-productive.

“A study carried out by NDR looking at all perceived worldwide crises since 1900 found that there are always knee-jerk price falls, but in all cases markets are back up six and nine months later,” he said.