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If you believe the bookmakers, there is roughly a 30 per cent chance that on September 18 the people of Scotland will take a giant step into the political, economic and financial unknown by voting to leave the UK.
The consequences of a decision to end Scotland’s three century-old political union with England would be both far-reaching and uncertain. There are no true precedents to guide the task of carving a new state out of major advanced economy. Individual investors, companies and institutions across the UK and beyond will see their fortunes affected for good or ill by the adoption of new fiscal, financial and currency arrangements.
Even pro-union campaigners accept that Scotland would be viable as an independent country. But many issues remain unresolved with less than four months to go until the vote. Here, FT Money looks at some of the most important questions that investors might have to contend with.
Will they really do it?
Opinion polls have consistently shown a clear lead for the pro-union side ahead of September’s referendum. The gap narrowed considerably over the winter but has in recent weeks appeared to widen again. The FT’s independence poll tracker puts support for a No vote at 48 per cent to 36 per cent for Yes, with 15 per cent undecided.
Yet pro-union politicians say nothing can be taken for granted. Some fret that the Better Together campaign against independence has struggled to offer a compelling case for staying in the union. Yes Scotland, the campaign to leave the UK, says opinion polls fail to capture a gradual shift toward independence.
David Bell, a professor of economics at the University of Stirling, says that “prediction markets” including the gambling industry are often a more accurate forecast of political events than opinion polls. A review of the odds offered by 23 bookmakers by Mr Bell this month put the probability of a No vote at around 70 per cent – far from a sure thing.
How would markets and businesses react?
Most business people are still betting on a No vote. But uncertainty created by the referendum is already making some outside investors more cautious about sealing deals in Scotland. Such caution is slowing activity in some sectors of the property market, industry participants say.
“There’s a lot of people who have just got to the point now [where they are saying . . .] maybe we should wait until after the referendum to do the deal,” says Walter Boettcher, director of research at global property services group Colliers International. “It hasn’t stopped things for us yet, though certainly we feel like we’re paddling through treacle a little bit.”
John Boyle, director for research at Rettie, the Scottish property agency, says overall recovery in the commercial and residential property markets is unaffected, but there are some suggestions that the referendum is having an impact on sales of homes priced at over £750,000. “The top-end residential market is showing signs of now beginning to quieten, as it is more dependent on buyers from outside Scotland,” Mr Boyle says.
Financial advisers have been fielding anxious enquiries. Ronnie Ludwig, a partner in the private wealth team of accounting firm Saffery Champness, says some clients worry about what independence would mean for Scotland’s use of the pound and membership of the European Union.
“It’s causing uncertainty and in some cases even fear,” Mr Ludwig says. “A number of people are saying they don’t want to have any Scottish currency, because they don’t know what’s going to happen with that.”
Pro-independence campaigners insist such worries are unfounded. The Scottish government has set out a vision for independence in which Scotland will continue in a formal currency union with the rest of the UK and companies in sectors such as finance and energy will be subject to near-seamless cross-border regulation.
But the UK government and the three big Westminster parties insist they will not accept a currency union and that there can be no negotiation on the details of any post-independence settlement before the referendum.
Some companies say there will be plenty of time to respond in the event of a Yes vote. The Scottish National party has proposed March 26 2016 as Scotland’s independence day, leaving 18 months for preparations.
But other businesses fret that customers might not be willing to wait for more clarity and have started making their own contingency plans. Edinburgh-based insurance group Standard Life, for example, has announced that it could move parts of its operations to England in the event of independence. The announcement was aimed at reassuring the more than 90 per cent of the insurance group’s customers who live elsewhere in the UK or around the world that their interests would not be hurt by the creation of a new state.
“What the individual wants to know is the fine print and the nature of these big constitutional matters is you don’t get to the fine print at this stage in these processes,” Gerry Grimstone, Standard Life chairman, told journalists at its annual shareholder meeting this month.
A Yes victory in September would mean a “quantum leap in uncertainty” for investors, says Bill O’Neill, economist and head of the UK investment office at UBS Wealth Management.
Sterling would weaken because of a higher risk premium as investors weighed the impact of independence and the prospect of a UK general election in 2015 dominated by the issue, Mr O’Neill says. Yields on gilts would rise, although the impact would be capped by HM Treasury’s guarantee in January that it will take responsibility for all of Britain’s £1.2tn debt, including Scotland’s “share”.
Attention would also focus on companies with headquarters or substantial businesses in Scotland, having a particular impact on financial, energy and utility sector stock prices, Mr O’Neill says. “You’d certainly begin to see Scottish-linked shares suffer in the market,” he says.
How long would the uncertainty last?
It is impossible to know how quickly the Scottish government and the remainder of the UK might take to hammer out the terms of their separation. Both would have good reason to aim for a rapid and amicable result, but the process will be complex and highly political.
The currency question will be central, with some observers assuming that the UK would quickly rethink its rejection of a currency pact that would preserve an integrated financial market and limit barriers to trade.
Others, however, say UK reluctance means Scotland is likely to have to come up with a Plan B. Barclays analysts told foreign exchange clients this week that the most likely scenario would be the creation of a new currency, not least because this would give Scotland control over monetary policy.
Negotiators in Edinburgh and London may not be granted the luxury of hammering out the details at their own pace. Some analysts say damaging capital flight from Scotland is a real possibility.
Plans by the Czech and Slovak republics to maintain a currency union after their 1993 “velvet divorce” quickly foundered, in part because of the flight of deposits out of Slovakian bank accounts, Oxford Economics noted in a recent report on independence risk for Weir Group.
And capital flight put Greece’s membership of the eurozone in doubt during the recent sovereign crisis; it was only stemmed by strong action by the European Central Bank.
Mr Ludwig at Saffery Champness says he has already had clients asking for advice on how to move Scottish businesses and assets to England. “At the moment it’s a relatively small proportion, but if there is a Yes vote and there is no clarity – or if the clarity comes and they are not happy with what they are seeing – then I think the trickle will turn into a torrent,” he says.
Any fund flows out of Scotland could be fuelled by expectations that a new Scots pound would fall against sterling. But while Barclays analysts say their calculations suggest a trade-weighted Scottish currency could fall by as much as 16 per cent in its first year, they found that under other assumptions it could actually rise. Their core estimate is for a decline of just 1.4 per cent. By contrast, they estimate that the UK pound would fall a trade-weighted 3 per cent in the first year after Scotland’s departure.
Policy makers will have plenty of other issues to address, including arrangements for Scotland to take over responsibility for payment of state pensions. And private companies may have to grapple with EU rules requiring cross-border pensions to be fully funded. Resolving all such issues will take years.
Would there be opportunities?
Uncertainty and change would certainly create opportunities for canny investors. The process of separation and state-building would itself produce huge demand for people qualified to guide companies and bureaucrats through the legal, financial and organisational complexities.
“Rejoice you herds of accountants, you flocks of consultants and lawyers, at the hours of work that are going to be required,” Rupert Soames, then chief executive of Scotland-based power system provider Aggreko, told a conference last year.
Mr Boettcher at Colliers International says a “veritable professional services revolution” created by companies clamouring for help will fuel demand for commercial property, particularly in Edinburgh, where demand would also be boosted by the arrival of a host of new embassies and international representatives.
Would Scotland prosper or stagnate?
Both sides of the referendum debate agree that Scotland could prosper on its own, although pro-union campaigners say it will be much better off if it remains within the security of the UK. An independent state would also face considerable challenges, not least its dwindling oil reserves, relatively rapidly ageing population, a large fiscal deficit and – assuming it takes on the task of paying back its share of UK borrowings – a hefty stock of debt. Independence supporters say a sovereign Scottish government is more likely to set a policy course that will maximise prosperity. The SNP talks of a combination of lower corporate and aviation taxes and better welfare.
Much will depend on the choices of future Scottish governments and on their ability to maintain a co-operative relationship with the rest of the UK, which would be by far Scotland’s most important international partner.
If Scotland votes to leave, it will also be very much in the interests of the rest of the UK to make sure that separation works. Though 10 times larger than Scotland in terms of gross domestic product and population, the economy of the remainder would also suffer if divorce turned messy. The UK and Scottish governments have formally committed to “work together constructively” whatever the result of the referendum. People on both sides of the border will have to hold them to their word.
Mure Dickie is the FT’s Scotland correspondent
Cross-border commuters hesitate
Uncertainty over the outcome of the Scottish independence referendum is hitting house sales on the Scottish side of the border, according to estate agents, writes Chris Tighe.
“People won’t commit themselves to buying over the border until they know what will happen to the pound,” says Andrew Aitchison, director of a north Northumberland estate agency which sells property on both sides of the border. “There are still a lot of undecided factors which are making people nervous about moving to Scotland. It’s the unknowns, the fear factor.”
Among those holding back are retired English people who had planned on moving to Scotland, say estate agents. Other potential purchasers of Scottish borders housing who are hesitating include people working near the border, who can live on either side and commute to work. Scotland’s offers of free university education for residents, free prescriptions and social care for the elderly have helped attract some of these commuters.
Brian Reilly, manager of BPK estate agency in Dumfries, says this element of business previously accounted for about five per cent of BPK’s Dumfries office sales. But this market, at least for now, has gone.
At Melrose & Porteous in Duns, Alan Young, property assistant, says one couple with two young children, who had sold their property, have decided to live in rented accommodation in the area pending the outcome of the referendum. They want to see the impact on schooling, he says. “They didn’t know whether to buy in Scotland or England.”
“If anything, if it does go independent, it will help the English side,” says Mr Aitchison.
Agents in northern English communities, such as Berwick-upon-Tweed and Carlisle, say enquiries and sales have picked up over the past year, thanks to increased general confidence, not to any Scotland-related factor. Proximity to the border has not had any adverse impact, they say.
Home to investment trusts
More than 40 investment trusts are legally incorporated in Scotland, according to research from Winterfloods, writes Jonathan Eley.
This figure includes some that are not obviously Scottish, such as the Templeton Emerging Markets Trust and Finsbury Growth & Income Trust.
|Scottish Mortgage Trust||2.86|
|Templeton Emerging Markets||1.94|
|Edinburgh Investment Trust||1.42|
|Aberforth Smaller Cos||1.13|
|Source: Winterfloods, FT.com|
Simon Elliott, an analyst at Winterfloods, says any changes in taxation or regulation could have ramifications for the sector – although he points out that a future Scottish government might decide to make the regulatory regime more accommodating to ensure trusts remain in Scotland.
Legally redomiciling a trust has been done before, but is quite a complex process. For example, moving Henderson Far East Income trust from England to Jersey in 2006 cost about £450,000.
Sometimes, the process results in a special dividend as a company pays out its revenue reserves before winding itself up, adds Mr Elliott.
Moving large investment teams and administrative staff is more complex and expensive.
Alliance Trust, the largest trust with over £2bn in assets, said earlier this year that it had set up subsidiary companies in London as a contingency plan.