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Financial Planning > Behavioral Finance

What Would Scottish Secession Mean for Investors?

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Divorce nearly inevitably leaves deep financial scars, apart from the emotional ones, and the possible dissolution of Scotland’s relationship with the U.K. is already leaving its mark ahead of next week’s independence vote.

A key turning point came over the weekend when an opinion poll gave the “yes” on independence vote its first-ever lead in the run-up to the Sept. 18 referendum.

That change in sentiment startled markets, sending the value of the British pound against a panoply of world currencies sharply lower.

Scotland-based banks, such as the Royal Bank of Scotland and Lloyds, are among the companies whose stocks have fallen hardest since public opinion has shifted in a pro-independence direction.

Indeed, the Financial Times reports that financial advisory firms are seeing a frenzy of financial fear on the part of wealthy investors, citing wealth management firm Multrees Investor Services as moving hundreds of millions of pounds in anticipation of next week’s vote. An executive at the firm was quoted as saying: “If our clients are doing it, then other financial services companies are doing it as well.”

Indeed, one independent financial advisor told the Financial Times a single client has moved over a million pounds — about $1.62 million — out of stocks and into cash, saying that the elderly and those nearing retirement “are worried about their assets.”

While the wealthy are worried, it is a middle-class majority that seems to be swelling the pro-independence vote to its current lead in the polls.

That was the on-the-ground perspective of finance professor Moshe Milevsky, who recently returned from Scotland and England. He was researching his next book, King William’s Tontine, which covers the period of the 1707 Act of Union — which Scottish secessionists are now seeking to undo 307 years later.

Milevsky says he observed a distinct social cleavage separating supporters and opponents of independence.

“I had some very interesting conversations with both ‘commoners’ — hotel staff, taxi drivers, people in the pubs — and the ‘business types’ in Glasgow and got a very different reaction,” he tells ThinkAdvisor.

“I sensed a very strong and growing nationalism and patriotism from the commoners. Most of them felt rather strongly about the importance of voting ‘yes’ and taking advantage of this one chance that doesn’t come along often. Some even used phrases like ‘we were conquered’ and other such language.

“Amongst the business types the reaction was the exact opposite,” the finance and annuities expert continues. “Their fear — which I think is justified, is that King Alex [as they nickname Scottish National Party leader Alex Salmond] doesn’t understand the economic implications, is making false promises, etc. This is an irreversible vote and — unlike the usual electoral cycle — it will be impossible to … ’throw out the bastards’ in a few years, when their economy plummets.

“So, these folks will be voting ‘no,’” Milevsky concludes, “but have to be rather quiet about it because they fear alienating clients, especially if the ‘yes’ side wins.”

Perhaps the most elite of those financial types is Mark Carney, the governor of the Bank of England, the U.K.’s central bank with responsibility, currently, for guiding economic and monetary policy in Scotland and the other components of the U.K., namely England, Wales and Northern Ireland.

In a speech Tuesday before the Trades Union Congress meeting in Liverpool, Carney’s comments on independence were unusually sharp for a central banker, a profession known for bloodless, elliptical references.

Said Carney, according to a transcript of his remarks:

“We take note of the positions of all the major Westminster parties to rule out a currency union between an independent Scotland and the rest of the U.K,” a transcript of the speech records. “So it’s in that context, just to put it together, in that context a currency union is incompatible with sovereignty.”

Harvard financial historian Niall Ferguson also appears skeptical of Scottish independence. The Irish Independent newspaper quotes the Scottish native as saying his homeland would more likely be an “impoverished backwater” than a Scandinavian superstate.

Meanwhile, in a commentary published Wednesday by Axel Merk, the currency fund manager says the shift in public sentiment over the weekend in favor of independence has awakened a market that has been dulled to risk by quantitative easing.

Markets are typically volatile in normal times, Merk writes, but central bank actions that “make risky assets appear less risky” expose investors’ shock of surprise when they relearn that “the world is a risky place.” 

Echoing Milevsky and Carney, the currency funds manager advises investors to “not forget that when a country splits up, there may be a flight of mobile capital to the stronger,” noting that “the vulnerability remains with Scotland, as it has to play catch-up with institutions building.”

He also warns of an asset-liability mismatch given that “the Scottish financial system is about 13 times Scotland’s GDP,” suggesting independence could “destabilize Scotland.”

For investors, though, Merk notes that volatility is good for a portfolio. Since “30% to 50% of international equity returns are due to currency moves,” astute investors should see volatility as a money-making opportunity.

Since the same poll that shows Scots are leaning toward independence shows they also concede they’d be worse off financially, the possibility exists that on the day of voting the ballots will look quite different from current polls.

Ambiguously, though, Merk adds that “if there’s a ‘yes’ vote, the opportunity may get even better.”

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