Comment: Don’t expect market paralysis to last

Nearly £17 billion of UK shares, bonds and assets have been dumped by investors over the past month – yet this leading UK index is up 136 points on four weeks ago.

RBS is moving its head office amid fears of regulatory uncertainty and depositor flight – yet its shares are fractionally up on the month and 16 per cent up on their level in April. Diageo is five per cent up on a month ago  and Standard Life 12 per cent. What’s going on?

Either the London stock market doesn’t reckon the outcome is as fateful as “Great Depression” forecasters suggest – or it is paralysed by an outcome now so close to predict.

This is a deeply worrying time for investors – north and south of the Border. Not only has the prospect of a Yes vote for independence caused many to begin shifting their assets and savings out of Scottish banks and investment institutions, but such an outcome would also almost certainly hit sterling and shares across the board on heightened political uncertainty across a broken UK. For companies with a high level of trade across the Scottish border, an immediate sell-off is likely.

So why have equity markets appeared so sanguine? After the initial shock of a Yes vote in a YouGov poll eight days ago, further polls have suggested that No is still – just – in the lead, and this is the outcome most in the financial sector still expect.

And on a market perspective there are two consoling factors that have – so far – put a brake on a stock market sell-off. First, the fall in the pound will be of benefit to UK exporters, making UK goods and services more competitive in international markets.

And second, the heightened uncertainty is likely to encourage the Bank of England to delay a rise in interest rates, quelling fears of higher money costs for business and mortgage borrowers alike.

However, the prospect of an independent Scotland has caused many to reconsider the safety and security of their pensions and long-term savings.

As well they should. The worry is not so much independence per se but two deeply troubling consequentials. The first is at least 18 months of uncertainty until basic questions over the future of Isa schemes, the tax shelter of pension savings and the regulatory environment for Scotland’s financial sector are resolved. Oh, and the currency. As these negotiations are likely to take much longer than 18 months, many will simply not be prepared to wait that long and will shift to rUK- based investment and savings providers.

Looking further out, there is also good reason to worry about the outlook for tax levels and rates. In a paper out this weekend from the Centre for Policy Studies, economist Tim Morgan identifies three major risks: a fall in North Sea oil revenues to £3.7bn in 2016-17, some £3.2bn adrift of the £6.9bn predicted by the Yes campaign; continuing flight by the financial services sector that could leave 2016-17 revenues ex-North Sea about £9.2bn lower than predicted; and the rising cost of public sector pensions that could leave Scottish government revenues overall £13.8bn adrift. Tax increases and spending cuts would be difficult to avoid.

For the rest of the UK, a Yes vote would also have negative consequences for investors. It would see a sharp deterioration in the UK current account balance, from 5.5 per cent of GDP to more than 7 per cent. Add to this the jump in the rUK’s debt ratio to 100 per cent of GDP with a consequent risk to government borrowing costs and credit ratings and it is little wonder that George Osborne, the Chancellor, and Mark Carney, Governor of the Bank of England, have cancelled plans to attend a G20 meeting in Australia this week to be on hand in the event of a financial run.

The result is likely to be announced on Friday morning, just in time for the opening of the markets. Setting the long-term implications of a Yes vote to one side, should the independence camp prevail, a bout of market volatility and a sharp dive in the pound looks the likely immediate result.

Given the passion and intensity of the referendum campaign, a No result will hardly settle matters. Political uncertainty will transfer to Westminster, the progress of “more powers” legislation and a looming referendum on the UK’s membership of the EU in the event of a Conservative win in the May 2015 poll.

Whatever the outcome, the FTSE 100’s apparent equanimity so far could prove dangerously misleading.