UK Market Awaits Scottish Referendum

Terry Flanagan

Sterling and other UK assets are likely to come under additional pressure if Scotland votes for independence according to BlackRock.

The Scottish referendum on independence is being held on September 18.

Russ Koesterich, chief investment strategist and head of the model portfolio and solutions business at BlackRock, said in a blog that a vote for an independent Scotland would have broader significance outside the UK, particularly for the rest of Europe.

“At the very least, sterling and other UK assets would likely come under additional pressure,” added Koesterich.

He said that as Scotland favours the European Union more than than the rest of the UK, a vote for independence could increase the likelihood of the UK leaving the EU and encourage other separatist movements, such as Catalonia in Spain.

“For now, our vote is on a narrow victory for a continued union, but should Scottish independence prevail, investors should prepare for some uncertainty for the broader European Union,” Koesterich added.

Viktor Nossek, head of research at Boost ETP, the European exchange-traded fund issuer, said in a report the the result is too close to call which is putting pressure on UK’s currency and credit markets and driving downside risk to UK equities.

“Secession weakens the economic fundamentals for Scotland, exposes the rest of the UK to unwarranted credit risks and diminishes London’s political clout,” added Nossek. “UK mid- and large-cap equities are at risk of being de-rated.”

Nossek recommended that as a result it may be prudent to hedge long positions in UK bonds and equities.

Markit, the data provider, analysed the performance of the 12 Scottish stocks in the FTSE 350 against the UK market since the start of 2013.

The analysis found that the standard deviation of the daily returns of the Scottish index been a third higher than the FTSE 350 average. Markit said the increased volatility was due to the smaller size of the universe and the lack of diversification.

Utility firm SSE is largest constituent in the Scottish index with over one quarter of the overall index weight and the three financials are 40% of the index weight.

“However, one of these firms RBS has already stated its intention to move its domicile to England should the yes campaign prevail,” added Markit.

Featured image via Dollar Photo Club

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