No more was this more keenly felt than in the value of the pound, which plummeted in the first few hours of morning trading.
The poll was clearly damaging for the ‘no’ campaign, as it suggested not only a narrowing of the polls, but that the market was starting to price in a ‘yes’ for the first time.
Sterling has been in a strong position for most of 2014 but has fallen sharply since the beginning of September and is currently at a 10-month low relative to the dollar, down more than 6 per cent from its high in July.
Performance of sterling vs the dollar in 2014
Source: FE Analytics
The weakening of the currency could continue, according to Brenda Kelly, chief market strategist at IG Group.
“IG is currently offering a 24 per cent chance that £/$ will touch 1.5750 by the end of this month. This is clearly not definitive but it does indicate the uncertainly surrounding the public debt risk,” she said.
“Clearly one of the core issues lies with the currency that Scotland would use in the event of independence.”
“The prospect of exiting the pound could trigger bank runs as savers attempt to protect their deposits. Banks based in Scotland are widely expected to move down south and thus this significant flow of capital leaving Scotland would do no good to the Scottish economy.”
However, a weaker sterling could be beneficial for some stocks that have seen its strengthening this year erode profits derived from overseas.
This has largely affected FTSE 100 companies more than their small and mid cap rivals, which tend to be more domestically focused.
Rob Jukes, global strategist at Canaccord Genuity, says a weaker sterling could provide a boost for equity markets, particularly for global large caps and exporters.
“Weaker sterling would normally lead to outperformance of exporters and I would expect those to do relatively better. So putting a broad brush on it, that should benefit the FTSE 100 more than the FTSE All Share,” he said.
“Generally the UK economy has fared less well with sterling at these levels than it has done when sterling fell in the early 90s when the UK left the ERM and we had a big improvement of UK plc.”
“I think sterling is probably still too strong.”
“The market hasn’t previously taken a yes-vote seriously, but is a 3 per cent fall in the currency really the market properly pricing in a landmass disappearing into another country? It probably isn’t in my opinion.”
Some of the five-crown rated UK funds that have a high weighting to large cap multinationals are FE Alpha Manager Nick Train’s CF Lindsell Train UK Equity fund and FE Alpha Manager Francis Brooke’s Trojan Income fund.
Train, who runs a highly concentrated portfolio, is taking big bets on consumer stocks such as Unilever and Diageo. Both of these FTSE 100 names derive the majority of their earnings from abroad and have therefore faced the sterling headwind.
Brooke also holds Unilever in his top-10 as well as Imperial Tobacco and HSBC.
Both of the funds have comfortably outperformed the UK equity market, turning in top quartile returns in their respective sectors over a seven-year period.
Performance of funds vs index over 7yrs
Source: FE Analytics
Tom Becket (pictured), chief investment officer at Psigma, recently told FE Trustnet that a weaker pound was overdue and was likely to put upward pressure on UK inflation.
He said investors should protect against this in their portfolios ‘while inflation insurance is moderately priced’.
“One efficient way would be Schroders Global Inflation Linked Bond fund, where there is a decent allocation to UK inflation-linked bonds and foreign currencies,” he said.
The €500m fund buys government bonds. Its largest allocation is to the US with a 46.77 per cent weighting. The UK is the next largest at 30.66 per cent of AUM.
The fund has beaten the sector and benchmark over the past three years, with returns of 12.28 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
It is behind both its benchmark and the sector average over five- and 10-year periods, however.
Trevor Greetham, director of asset allocation at Fidelity, says the selloff in sterling is starting to feel overdone and that a strong bounce would be likely on a no-vote – which he says is still very much the most likely outcome.
“In the event of a ‘yes’, things would get messier, though we’d still favour sterling over the euro. It’s hard to argue the Bank of England would hold off tightening in 2015 due to what could be 18 months of divorce negotiations.”
“A run of marginally weaker housing and manufacturing sector data in the UK relative to the US justifies a weakening trend in sterling versus the dollar, but the clear policy divergence between likely Bank of England tightening relative to ECB easing continues to favour sterling versus the euro, irrespective of the outcome of the referendum on Scottish independence.”
The referendum is due to take place in 10 days’ time, on Thursday 18 September.
