It’s difficult enough to spend Scottish banknotes in London. It’ll be virtually impossible if Scotland becomes an independent nation once again.
Of course, only one poll puts the Yes campaign out in front with the smallest of leads (51% versus 49%).
It’s the narrowing of the gap is most striking.
A month ago the No campaign led in the same poll by 61% to 39%.
If not now later?
Our best guess is that the Scots will vote to stay but a narrow defeat will not the genie back in the bottle.
In the event of a No vote, the long-term effects of ‘devo max’ might be to muddy the waters at Westminster to the extent that independence is seen as a political necessity for both the Scots and the English & Welsh.
In any case our political apparatus will never be the same again.
So what impact might a separation have on the financial markets?
Double, double toil and trouble
First, let’s look at the timetable for change.
With the vote on 18 September, independence would be more than a year away even on the most optimistic of timeframes.
The SNP may target 24 March 2016, but negotiations will be complex and long. Nothing is going to happen overnight.
The pound has shed a little of its value recently. However Monday’s sharper fall on news of a lead for the pro-independence movement has caught some investors and lots of politicians off-guard.
Just a single for me
We think the effects of Sunday’s poll are a little exaggerated.
The FTSE 100 Index finished down 0.3% on Monday with the banks, a handful of Scottish investment managers and life companies leading the declines.
But the French and Spanish markets lost a similar amount too.
We are generally bearish but even we can’t see a connection between a Yes vote in Scotland and declines in the global equity market.
Having said that, it is true that the equity, bond and currency markets don’t like uncertainty.
We can expect some pressure on sterling and, perhaps, a wider risk premium on gilts and those shares listed in London which are sensitive to domestic affairs.
The Banking sector may be subject to particular uncertainty as capital flees Edinburgh for a more certain home in London.
Carney keeping cool?
It is reassuring that the panic in the ranks of politicians is not mirrored at the Bank of England.
Mark Carney, Governor of the Bank of England, was asked by the BBC’s Kamel Ahmed about a possible Yes vote during the Inflation Report press conference back in mid-August…
‘Uncertainty about the currency arrangements could raise financial stability issues… we have contingency plans. And I’d just underscore that in terms of our responsibilities for financial stability, we do have a wide range of tools and plans’.
Should we doing anything?
We are not taking the potential breakup of the union lightly.
It will have some important macro-economic implications and a great many questions will remain unanswered for an uncomfortable period of time. That will lead to some volatility.
But over the full course of a market cycle – irrespective of a Yes or a No – I think that the question of Scottish independence is a trivial one for long-term investors.