A recent poll by FE Trustnet indicated that more than three quarters of IFAs and private investors have failed to protect their portfolios against the repercussions of Scottish independence.
Just 23 per cent of respondents said they were preparing their portfolio for a yes-vote, reflecting a lack of preparation or concern about the disintegration of the Union.
However, while this figure is low, it is significantly higher than the figure of 17 per cent for when we asked the same question last month, reflecting a growing anxiety that an independent Scotland is now a distinct possibility.
The risk to markets of a breakaway by Scotland was expressed for the first time this week as sterling began to slide following a shock Yougov poll at the weekend that suggested the Yes campaign was ahead for the first time since the referendum was announced in 2012.
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. According to FE Analytics, it is down almost 6 per cent from its high in July.
Performance of sterling vs the dollar over two months
Source: FE Analytics
A recent FE Trustnet article highlighted some of the implications that a prolonged weakening of sterling could have for investors’ portfolios.
Gleeson says that while the poll indicates a muted response from both advisers and private investors, there are some big unknowns in the event of a "yes".
“The prospect of an independent Scotland opens up a number of structural questions for fund investors; what happens to fund domiciles? Will their funds become 'offshore', or be registered in the UK?”
“What is the Scottish version of the regulatory body going to be? How will tax be administered, and what tax treatment will investors get in the UK? However we view the politics, there would be a huge cost incurred by an independent Scotland, which will most likely be paid for by investors,” said Gleeson.
“For investors who are concerned about the immediate implications on their underlying holdings, UK funds which are overweight mid caps and small companies will be hit harder than large caps, but this is likely to correct as soon as we see any certainty.”
Over the past 20 years, mid caps have tended to sell off more rapidly during periods of market weakness compared with large caps.
This has been materially matched by rising faster in upward markets. The FTSE 250 has doubled the gains of the FTSE 100 over the past 20 years.
Performance of indices over 20yrs
Source: FE Analytics
Toby Nangle, head of multi-asset allocation at Threadneedle, says the outcome looks too close to call but the implications for financial markets of a vote for an independent Scotland are meaningful.
“Currency union break-ups have been rare and tumultuous events; hence we expect international interest to be significant,” he said.
“In Scotland's case, scrutiny over the course of a break-up in the event of independence would be intense: the country is highly developed and has an outsized financial sector relative to the rest of its economy.”
“Markets dislike uncertainty and the timetable for complex negotiations surrounding constitutional divorce is necessarily long.”
He says that a yes-vote would knock back markets although despite the huge shift in polling, financial markets still attribute a very low probability to independence.
“Given the constitutional and economic uncertainties attached to a potential break-up of the UK, a vote for independence would likely deliver a negative shock to UK financial assets and lead to meaningful currency weakness.”
“We are unable to discern any meaningful risk premium in UK equities and the sterling weakness experienced over the past month has been principally against the US dollar: against the euro and the yen, sterling is almost unchanged.”
However, Nangle says that banks domiciled in Scotland could be among the businesses hit hardest.
“Scottish banks could see their value fall should they suffer depositor flight. Domestic Scottish-facing companies with significant amounts of sterling debt referencing English law may find their assets and liabilities no longer matched: they would have sterling liabilities but Scottish currency revenues.”
“This situation has caused all sorts of problems in emerging markets where this sort of mismatch is most common.”
Over the past two weeks, UK banks with a strong connection to Scotland have seen a significant de-rating in their respective share prices of more than 4 per cent.
Performance of equities over 2 weeks
Source: FE Analytics
TSB – which floated in June – is headquartered in Edinburgh, as are Lloyds and RBS. All three all have significant exposure to Scotland.
HSBC and Barclays, which both have little exposure to Scotland, have been broadly flat over the same period.
