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Scottish Referendum Creates Market Uncertainty

With less than to go until the Scottish vote for independence, Newton Global Strategist Peter Hensman describes the impact either result could have on markets and the economy

Emma Wall 12 September, 2014 | 7:30AM



Emma Wall: Hello, and welcome to the Morningstar series, Market Reaction. I'm Emma Wall and here with me today is Peter Hensman, Global Strategist for Newton.

Hello, Peter.

Peter Hensman: Good morning.

Wall: So, we here today to talk about the rather contentious issue of the Scottish referendum. The polls are quite undecided. There seems to be everyday a new one that says a 1 point clear of 'Yes,' 1 point clear of 'No'. If we do get a 'Yes' vote, what's the impact on the U.K. economy?

Hensman: Well, unfortunately that is one of the things that is really uncertain because the terms of the breakup are very unclear. We really can't say exactly what the outcome is going to look like. And so to us, this uncertainty is going to continue to hang over the economy for some time.

Wall: I've read somewhere that the paper put forward for the 'Yes' vote was sort of 500 pages long and the one put forward to propose HS2 is 20,000 pages long. So, there are quite a lot of things that we have been told will have to be worked out after the vote. Is this uncertainty having an impact?

Hensman: Well, it certainly seems that way as we get closer to the actual poll very much because the opinion polls are closing in. So what was an issue that was being ignored is all of a sudden a life thing to consider. And it's not just about the U.K., it has broader ramifications across the world as well.

Wall: And what are these ramifications? Because as you say, this is not just about whether Scotland stays or leaves the U.K.

Hensman: That’s right. This is being watched around the world. So, what the world sees is perhaps the longest partnership between countries, over 300 years of history, potentially dissolving, and the implications of that for some newer partnerships is potentially very large.

Obviously the issues around the Eurozone are very fresh in the memory and particularly for a country like Spain where we see Catalonia and the Basque region have very recently called for more independence and even secession from the Spanish country. And also across the world, this is being watched in terms of can this institutionally a very long history survive the challenges it currently faces.

Wall: And does that call into questioning the fate of the euro?

Hensman: Well, it perhaps is something that we see come back into the markets' mind again. So last week we saw the latest efforts of the ECB in trying to demonstrate that the euro has a future that they can restart the economy within that region. And yet, there are issues that obviously the ECB can't address, and an increasing question about whether populations want to be part of this broader group is one of things that monetary policy and just liquidity can't address at all.

Wall: What are the impacts then on the market? Obviously we can't predict whether it is going to be a 'Yes' or 'No' vote, but either way there is going to be quite a lot of uncertainty. There is going to be quite a lot of change of power even with a 'No' vote. So how does that impact markets?

Hensman: That's right. What we see is that even a close 'No' vote with the scramble to promise more and more independence for the Scottish region within Great Britain if it were to remain creates uncertainty about what it is we're left with.

But there are also very particular sectorial impacts as well. One obvious one if we do see a 'Yes' vote is perhaps the utilities sector, where the risk is very much, we see a move for a windfall tax to raise revenue for the newly independent government in a very populist kind of way. And obviously, as a utility company you can't just choose to move your assets elsewhere, you're very literally fixed on the ground and so these issues are going to remain very live for some time to come.

Wall: Peter, thank you very much.

Hensman: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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About Author

Emma Wall  is former Senior International Editor for Morningstar

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