Will the Scottish vote to end the union of 1707? What are the implications for investors and more specifically, for the Fiducia Mastertrust portfolios?
The debate that has taken place has in the main been around two concepts, for the Better Together camp it is “the economy, stupid” (to repeat a well-used political mantra), for the YES camp it is essentially an emotive, banish Westminster (as well as the Tories) and we will do a better job running the Scottish economy.
The polls indicate the vote is too close to call and victory by a small margin by either side will leave many questions unanswered and therefore future uncertainty. If Better Together win, the Scots have been promised ‘devo max’, in other words more control over tax and spending. This is almost certain to lead to similar demands from Northern Ireland, Wales and the English regions and consequently a move to a more federal rather than central form of government.
If the YES camp wins, the immediate issues are in relation to Scottish companies, some of the biggest, especially the banks and others in financial services, will have to relocate south of the border and contingency plans have long been in place.
There will be a long period of negotiation over the terms of separation, far longer than the 18 months quoted by Alex Salmond – up to five years has been mentioned. Will it be possible to hold the General Election in 2015 if the future constitution is not settled by then – it won’t be.
So, to go back to the question I posed, what does the outcome, whichever it proves to be, mean for investors? Among the many surveys, one published today by Capital Spreads has canvassed the views of more than 200 fund managers in Britain who are responsible for £6.1 trillion of assets. Of those managers 58% believe a UK economy without Scotland would be stronger within 10 years and that optimism would continue to grow over that time frame. This is in part due to welfare spending, demographics, transport costs, the ending of the Barnett formula etc. On the other hand, 33% of fund managers believe the UK economy would suffer from separation.
The referendum and the potential outcomes have been a topic of discussion at our monthly Investment Committee meetings and as a result we have sought to implement decisions to mitigate the potential risks. For example, we have always had a low exposure to UK equity funds, for a number of reasons, not just the Referendum.
It is our long held view that emerging economies, rather than the USA, UK, Europe etc, provide the best growth prospects and this has been consistently reflected in our portfolios. We also have a very low weighting to UK sovereign debt (Gilts) and Corporate Bonds, principally because of the effect on their values when interest rates begin to be lifted back to more normal levels.
We have seen the pound fall as the polls have shown the gap in voting intentions narrow. That is not necessarily a bad thing because it had increased in value in the expectation of interest rate rises, which made life more difficult for UK exporters. A sterling crisis is not anticipated by the markets and the Bank of England and Treasury are expected to tough out any short-term currency fluctuations. To be clear, there are no reasons for any changes in global market prospects arising from the Referendum and that is where the majority of most portfolios are invested.
The other point is that while markets don’t like uncertainty, they also look forward and price in the effect of anticipated future events. The rest of the world believes we are a mad island even contemplating the ending of a Union that has survived all forms of challenge for over 300 years. The decision is of course being made by only 7% of the UK population and not by all Scots, only those still north of the border. Let us hope they reflect on the really important issues and use their vote wisely.
Finally, among several interesting recent articles there are two in today’s Daily Telegraph. One by the Scottish historian Niall Ferguson “Alone, Scotland will go back to being a failed state” and the other by Neil Oliver “Now is the time for Scots to think small”.