The debate on Scottish independence has been in and out of the headlines for months. Part of this excitement is justified - as we said back in February, “this is potentially the biggest single political and economic event in UK history for a century”. Over the summer, international events have dominated press coverage, but with the referendum now just a week away, the media hype machine is providing round-the-clock coverage.
With that in mind, it is worth discussing a few key points; the result, any ramifications, and our portfolio positioning.
The Result
Predicting the outcome of a public vote is difficult (Pub quiz fact: the act of trying to do so is called psephology), particularly on occasions like this, where emotion is as important as rational choice.
Nevertheless, by looking at the collected responses to 79 surveys over the past 18 months, despite the headlines generated by the Sunday Times opinion poll, that gave the Yes camp a slender majority, it seems as if the current trend is towards Scotland remaining in the United Kingdom, with the ‘No’ vote having a majority of 51 per cent.
This majority has remained pretty stable over time too – since February 2013, 10 per cent of people who responded“Don’t Know” have chosen a side, 6 per cent in favour of independence, 4 per cent against. If the remainder of the “Don’t Know” camp splits similarly, Scotland stays emphatically put within the UK.
Ramifications
A ‘No’ Vote:
With the above information in mind, we continue to believe that a vote for independence is unlikely – our central case for the UK remains unchanged; continued recovery with monetary policy gradually beginning to tighten over the next 12 months.
A ‘Yes’ Vote:
If the vote were to go the other way, the route to Scotland becoming a fully functioning, stand-alone nation is far from clear.
It is worth pointing out that Scotland won’t immediately sever all ties with the rest of the UK come 19 September. Instead, a protracted period of political negotiation will occur in which the terms of the independence are agreed upon by both sides. The biggest question of all revolves around Scotland’s choice (or lack of choice) of currency post-independence.
The options are:
•Sterling Union: A continued currency union with the remainder of the UK. On the face of it this would be the simplest and cheapest solution – no changes needed to financial institutions/services. The main problem here is that all 3 major political parties in the UK have refused to agree to this course of action (as indeed have senior Treasury and Bank of England officials). Although that alone is enough to stymie this choice for Scotland, there would also be precious little actual independence achieved – still using the pound, no independent Scottish central bank, and with decisions on monetary policy made in London (and possibly fiscal constraints too).
•“Sterlingisation”: Using the pound without a currency union. This is in theory a viable option – keeps costs to a minimum, and has precedents such as Panama’s use of the dollar. However, this choice gives zero control over monetary policy; the Bank of England would have no obligation to consider the plight of Scotland in any of its policy decisions, which could be problematic (for Scotland) if economic cycles begin to diverge. Again, the amount of independence gained is questionable. Additionally, many Scottish-domiciled companies would probably be incentivised to move south of the border, preferring certainty of monetary control to uncertainty.
•Join the euro: Joining the euro might seem sensible – but at the moment, Scotland is the second biggest fish ina pond of four (with England, Wales and Northern Ireland), something that will certainly not be true in the eurozone.Added to that is the fact that any application to join the euro is subject to a veto by any EU member – Spaindoesn’t want independence movements encouraged due to its Basque and Catalan separatist regions, and(completely speculatively) it would be possible that the remainder of the UK could block an application out ofspite.
•New Scottish currency: Launching a brand new currency is not a simple matter – it is expensive for one thing.However the real issue is the value that the world would place on such a currency with so little history and anuncertain future. Exposure to the global FX markets is no small risk, particularly for an open economy likeScotland that would rely on two very susceptible industries – oil and finance. The issuance of government debtwould likely prove expensive too, as it is for most brand new issuers on the global stage. This option, while trulybeing independent, would be the riskiest of all of the above.
There are of course other issues that independence would bring, but from our point of view, the currency is the first, huge hurdle Scotland would face – all other challenges pale in comparison.
Ben Kumar is an investment manager at 7 Investment Management
