InvestmentsSep 22 2014

Union victory fails to quell fears of ‘shorting’ investors

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ByBradley Gerrard and Matthew Jeynes

Large numbers of investors have continued to take defensive action in spite of the ‘No’ vote in the Scottish independence referendum last week, as political uncertainty remains.

In spite of the pro-union victory, prime minister David Cameron last week pledged to devolve more powers to Scotland and introduced the possibility of major constitutional reform, which would see England’s MPs have greater control over England’s legislation.

Many investors have continued to place ‘short’ bets on the UK’s stockmarket, positions that make money if the index falls, as they fear political uncertainty in the UK remains.

Economists said the ‘No’ vote would see the Bank of England become the first developed-world central bank to raise its interest rates from an all-time low of 0.5 per cent.

Passive specialist Boost ETP’s co-chief executive Hector McNeil said investor appetite for passive funds that short the market had continued uninterrupted.

The company said it saw $50m (£30.5m) of FTSE 100 short and leveraged exchange-traded products bought in August, the “largest this year”.

It said September “may beat that record” as more than $30m in FTSE 100 short products had already been traded this month.

Mr McNeil said trading was roughly “treble the average volume” on the day of the result.

He added he thought the “genie was out of the bottle” and that the current shape and form of Westminster was “doomed”.

Other investors expected the ‘No’ vote to free up the Bank of England to raise interest rates, but they said that potential political changes could also cause issues for investors.

Ian Kernohan, chief economist at Royal London Asset Management, said constitutional reform would “introduce additional complexity into the UK political structure and might add an additional risk premium to gilt markets”.

Meanwhile, Bill O’Neill, head of investment office UK at UBS Wealth Management, said the “largest impact will be political” and expected the Bank of England would be “more likely to raise interest rates as the recovery continues”, something Mike Amey, head of sterling portfolios at Pimco agreed with.

He said the bank rate would move higher “in the first quarter of 2015”, suggesting the BoE would “likely be the first of the major central banks to raise interest rates”.

Kames Capital’s John McNeill said: “The gilt market will now refocus on the economic outlook and the risks of a rise in bank rate from the Bank of England.”

Elsewhere, while sterling rallied against the dollar in early trading after the referendum, it quickly gave back its gains.