The movement toward Scottish independence from the U.K. has been building steadily, and while the outcome has yet to be decided after Thursday’s vote, the toll on the economy of the U.K. has been substantial.
In the past month, investors have taken $27 billion from British financial assets and fled. That’s the largest amount to exit the country’s economy since the Lehman Brothers meltdown in 2008. Debate still rages over whether an independent Scotland can, or will, continue to use the pound sterling as its currency, with Scotland saying yea and London saying nay.
And concerns have erupted over everything from North Sea oil to security to membership in the EU for a newly independent Scotland. Royal Bank of Scotland, Lloyds Banking Group, Clydesdale, Tesco Bank and others among other Scottish-based banks have said they’ll head south of the border should independence come to pass. So have Standard Life and Aegon.
Fear mongers have been busy warning Scotland against striking out on its own. Deutsche Bank’s global strategist Bilal Hafeez even compared the move to errors that launched the Great Depression, saying in a BBC Radio program that “the economic uncertainty that would ensue from independence, the unstable banking system that would also result, would really result in the Scottish debt having to offer much higher interest rates to attract investors.”
Retailers from supermarket chain Asda to John Lewis, B&Q and Marks & Spencer have all declared that prices will rise in Scotland if a yes vote carries the day, while one analyst raised the specter of the potential loss of the Royal Mail.
Still, if one follows the odds, British bookmakers say that bets are coming down heavily on the side of a no vote, although the votes are divided pretty strongly from one side to the other of Hadrian’s Wall. Scots overwhelmingly are betting for a departure from the UK and heavy hitters in London and surrounds voting that Scots will simply not turn out in high enough numbers to pull off independence—particularly after a Westminster blitz in the country a week ago that Scottish leaders termed “fearmongering.”
John Blank, chief equity strategist for Zacks, has a very pragmatic view of the vote, which, he said, echoes the Quebecois movement for independence in Canada. Blank said, “This is a very shrewd decision by Scottish leadership, because they [the Scots] are going to lose and they’ve learned from Quebec what to get out of almost winning.” Even though Quebec lost not one but two referenda on independence, the vote was so close in the second that the relationship changed between Quebec and the Canadian government.
The province of Quebec may have lost in a heartbreaker—50–49 percent—but in the aftermath, it gained considerably more sovereignty over its own operations. Not only has French been made the official language of the province, but its immigration policies have changed to favor those coming from French-speaking countries, such as Algeria and Morocco. In education, too, as well as taxation and cultural policies, Quebec has changed. Yet it hasn’t experienced the economic turmoil that London is promising for Scotland, should the yea-sayers win.
Polls are tight, although most show a unionist outcome by a slim margin. However, one poll showed an independence victory by several percentage points, although it discounted those who said they were undecided. Still, it’s close enough that even the IMF is worried about possible fiscal turmoil in the event that the Scots achieve a victory.
But they won’t, said Blank. “It’s a negotiation tactic. You put the other guy’s back against the wall, scare … him, he finally gives you what he should have given you anyway.” He pointed to Quebec’s current situation, with greater autonomy and a larger budget from the Canadian government. Montreal in particular has benefited, with the influx of businesses from banks to pharmaceutical companies since their last referendum: “They have … a low unemployment level, and they’re very French.”
“In certain political battles, when you give up, you win. The English will keep the currency union, move more social spending to Glasgow, and move business and defense to Glasgow where it needs to be, so it’s all good,” Blank said.
Why should that be? Blank said, “The problem in the U.K. is that London is too powerful, and the English are all in London … London is New York [financial center], it’s L.A. [fashion, culture], it’s Washington [government]…. Oxford and Cambridge [higher learning] are only half a day away by train. I think the English have too much power in London—Fleet Street, art galleries … everything’s in London.”
Blank said, “If you’re the Scots, who have traditions and their own style of doing business that’s very strong, you need some devolution to [combat that much] centralization…. Salmond [Alex Salmond, first minister of Scotland] said, ‘We want this, that….’ The Scottish legislature will no longer be [left out]. Scotland will get defense spending, business, health care placed in Scotland. [Those opposed to independence will win because they realize a yes vote will mean that they’ll] lose the currency, defense spending, [have] capital flight—what they gain isn’t enough.”
Had Scotland not pursued independence, he added, it would be very different: “You’ve demonstrated that you won’t fight; you gain no power, and they’ve lost respect for you—so not doing anything is a losing situation…. Both Scotland and England will win from a [Scottish] loss in the election.”
All that said, Blank cautioned investors against losing—because of shorts. “U.K. shares will pop up after the election, and then it will dissipate because short covering will no longer be happening. Ultimately these things are resolved and positive, but in the short term they’re negative, because of shorting.”
Investors should watch for a “V-shaped stock market: a top in volume on shorts on this trade, and then it will go back down,” Blank said, citing a similar phenomenon in May on Indonesian shares. “It just tanks really, really hard and fast, and then about a month or two later there’s a huge spike, almost recovering—a third or two thirds—and then it sputters along till about January. That’s the pattern here; you have to move fast as a long investor. Wait till after the shorts are out—a technical pattern that is getting long. Shorting is a chart pattern that is visible in many of these broad indexes. That’s what’s going to happen here.”
The return of the market will probably take at least three months, probably more,” he said. “You don’t have to rush out the door when the Scots lose. Profit-taking will be the first out. Everyone else will see it carve a second bottom. Make sure the downside is over and the shorts are out, and then it will start to pick back up. Expect a pop and then a smooth-rising FTSE to begin long trading on U.K. issues.”