A divorce, more like a highland fling

UK equities in particular took a bashing on Monday as the market finally woke up to the possibility that the Scottish could vote ‘yes’ in the upcoming referendum. Interestingly, gilts hardly moved; will they? Probably not, as fear of the unknown will finally hold sway over the desire to rid themselves of 300 years of rule from Westminster. Psychologists often point out how humans fear losing, money in particular, so ultimately the perceived downside risk will allow the ‘no’ vote to win the day. Much is being made of George Osborne’s apparent attempts to placate the Scottish people with some last minute concessions, whatever the outcome on September the 18th, the relationship between Scotland and the rest of the UK will change going forward.  

As an investor, how do you prepare for such an event? There are hedging strategies, buy puts in the option market, or another alternative could be to short sterling. Buying options will be costly as the option trader will not wish to sell his insurance policy too cheaply, shorting sterling is a viable option, but you could be in a crowded trade if the vote turns out to be a ‘no’. 

One could reduce holdings ahead of the vote that could involve crystallising unnecessary capital gains, so either way you lose. One can also take the view that if the doomsters are right no matter what you do, it may help at the margin, but ultimately it’s hard to protect oneself effectively from the consequences. There is one other option one can take: the positive view. In the event of a yes vote, Vodafone will carry on selling phones, Glaxo will continue to sell drugs, households will continue to need Reckitt Benckiser products and the world will keep turning, therefore any short-term weakness should be seen as an opportunity. 

The papers are full of risks on both sides and apart from offering a few morsels to voters, George Osborne will be working on contingency plans should a yes vote come in. One gets the sense Alex Salmond is playing a classic game of chicken, and he may well win it. Whether the rest of the UK likes it or not, one cannot imagine that in the case of a yes vote the British Government could sit idly by and let Scotland’s banking systems collapse. 

Despite all the sabre rattling, Scotland staying in the currency union, no matter how undesirable it may be, if it staved off a far worse result one would suggest must be the sensible outcome. Even for an extended period of time whilst a better solution was found. Like it or lump it, one-way or another the English and the Scottish are stuck with each other and a vote wont change that.

Posted on September 9, 2014 .