Following the most recent debate between the leaders of the two campaigns, opinion polls have narrowed.
Current estimations, according to YouGov, indicate 51 per cent will vote for Scotland to remain part of the UK and 38 per cent will vote for independence, leaving 11 per cent undecided - making the result close to call.
Here we take a look at some of the potential implications for markets whether Scotland says ‘Yes’ or ‘No’.
Yes
The potential for a ‘Yes’ vote has huge implications for markets, according to Capital Economics, particularly because equity markets have already priced in a ‘No’ result.
“A ‘Yes’ vote could provoke a strong market reaction. We would expect to see a fairly strong sell-off of Scottish equities and significant capital flight,” Capital Economics said.
“What’s more, the risk that, regardless of the formal currency regime, the rest of the UK might feel the need to bail out Scottish banks in a financial crisis, combined with a potential increase in the rest of the UK’s debt to GDP ratio if Scotland would not take on its share of the debt, could drive up gilt yields and hit sterling.”
Gilts have risen by more than eight per cent this year while yields have fallen. Rising yields would be bad news for bond investors as the market sells off.
Performance of index in 2014
Source: FE Analytics
Sterling, relative to the US dollar, has also appreciated for most of 2014, hitting several UK mega-caps’ Q2 earnings such WPP, before falling more recently back to almost the same level as the start of the year.
Performance of indices in 2014
Source: FE Analytics
A weaker sterling could therefore be an unexpected boon for companies deriving significant portions of their earnings from overseas.
Capital Economics also says Scotland’s huge financial services industry could be reduced in size due to a wholesale relocation of financial activity, including banks, insurance firms and pension funds.
“Unless Scotland could guarantee lender of last resort facilities, large parts of its financial services industry would decamp to England, probably accompanied by many non-financial businesses,” the group said.
In a recent poll of more than 1,000 FE Trustnet readers just 16 per cent said they had altered their portfolios to take account of the possibility a 'Yes' vote and a subsequent independent Scotland.However, 59 per cent of respondents to another FE Trustnet poll back in June said they had been put off buying a fund or trust run by a firm based in Scotland.
Rowan Dartington’s Guy Stephens also warns that a 'Yes' vote could knock back markets.
“The economic reality of a 'Yes' vote would cause money market turmoil, weakness in sterling and damage to companies based in Scotland.”
“Our best guess would be some sort of pegged currency arrangement if that should occur and a transfer of power from Westminster, with ongoing haggling over oil revenues, Trident and welfare liabilities.”
While this was previously regarded as unlikely by financial market he says there is now a lot more concern following the recent debate between Alex Salmond and Alistair Darling of the likelihood of a ‘Yes’ vote.
“Even if a 'No' vote is returned, it is likely that some degree of political change will come out of this which moves some powers to Edinburgh, such is the strength of feeling in Scotland. Let us hope that economic sense prevails and that market turmoil is avoided as few have considered the unthinkable up to now.”
No
The reaction from markets would be muted as the result is already priced in; however, markets could see a short-term uptick, Capital Economics says.
“The opinion polls have been so consistent in predicting a ‘No’ vote that it would be extraordinary if financial markets, including gilts, sterling and equities, had not largely priced in this outcome,” they said.
“Moreover, this presumption is consistent with the recent behaviour of market prices. So we would expect a very modest relief bounce at best.”
However a ‘No’ could also result in a more significant rebound for Scottish equities, where independence risk may be depressing prices, it says.
Scottish equity prices have underperformed the FTSE 100 since the referendum date was announced in March 2013, suggesting that they could still recover further.
Performance of 25 largest Scottish firms since March 2013
“There might also be a bit of a boost to Scottish business activity, since the possibility of independence appears to have been weighing on Scotland’s economy recently,” Capital Economics said.
“So on the announcement of a ‘No’ outcome there might bean uplift in gilts, equities and sterling, but this would be a relief rally at best.”
