Few investment analysts factored in a win for Alex Salmond in their forecasts at the beginning of the year, but with some polls showing the “Yes” and “No” campaigns neck and neck with less than a week to go, an independent Scotland is now a real possibility.
How an independent Scotland would look and function is still very much up in the air, but on a company level there are many worried investors out there.
The growing momentum behind the “Yes” campaign has seen a number of companies suffer significant sell-offs in recent weeks.Standard Life and more recently RBS and Aegon have made plans to move offices to London if Salmond is victorious, with many others expected to follow.
While most of the investment commentary surrounding the referendum has struck a cautious tone, head of Trustnet Direct John Blowers (pictured) says that the week leading up to next Thursday and beyond could present investors with a buying opportunity.
“The best buying opportunities occur when emotions get the better of markets,” he said.
“When panic selling ensues, that’s often when there’s money to be made.”
“The Scottish referendum has the potential to be an opportunity. In the build up to the vote some stocks have already sold off significantly, and if there is indeed a “Yes” vote, you’d expect some of these to sell-off to an even greater extent.”
“While the “Yes” vote has got some momentum behind it, it will still be a shock to markets if Scotland does become independent.”
Seven companies with significant exposure to Scotland saw more than £4bn wiped off their balance sheets when one poll had the “Yes” campaign ahead on Monday.
These include the likes of Aberdeen Asset Management, Lloyds, Babcock, Standard Life and Royal Bank of Scotland.
“Most of these companies have made back some ground since then, but a win for Alex Salmond could see these stocks fall again,” said Blowers.
“The losses may indeed be warranted – Scotland gaining independence has far reaching implications, and even after Thursday’s vote there will still be uncertainty. However, an emotional reaction could throw up some opportunities.”
Performance of stocks and index since 1 Sep 2014
Source: FE Analytics
“You could invest in the stocks directly, of if you’re more comfortable with funds and investment trusts – which can be bought much more quickly than their open-ended counterparts – then looking at those with strong weightings to these companies may be of interest for investors looking to benefit from future falls.”
More than 70 IMA funds have major positions in Lloyds including Jupiter UK Growth and Fidelity Special Situations, which have an 8 and 4.5 per cent weighting, respectively.
Alex Wright’s Fidelity fund also includes SSE as a major holding, along with 13 other portfolios.
Ten funds hold Standard Life, including JOHCM UK Equity Income and Newton Higher Income.
Two funds – Kames UK Opportunities and S&W Revera UK Dynamic – hold both Standard Life and Lloyds in their top-10.
Mark Barnett’s Invesco Perpetual UK Strategic Income fund and Schroder UK Opps – formerly run by Julie Dean – are among the 14 funds that list Babcock as a top-10 holding.
While investors will naturally look at the biggest fallers in light of a “Yes” vote, Blowers says that there could also be an opportunity for less sophisticated investors.
“It’s not only stocks with strong ties to Scotland that have seen falls, as is often the case when the market gets spooked by a macro even,” he said.
“A number of stocks with zero exposure to the eurozone fell significantly in the summer of 2011, and rebounded very quickly. Something similar could occur if the “Yes” campaign is victorious.”
For those looking for core exposure to the UK in the case of a widespread sell-off, Blowers says a cheap and easy-to-access tracker fund such as Fidelity Index UK or Vanguard FTSE UK Equity Index are good options.
Alternatively, core UK funds such as Trojan Income, JOHCM UK Opportunities or the City of London IT are no nonsense alternatives for those in search of active portfolios.
“Investment trusts which see their discounts widen in the event of a sell-off may be of particular interest,” Blowers added.
Another possible way to play a referendum-led sell-off is selecting a value manager with a proven track record of picking up cheap stocks that have been oversold, Blowers says.
“These managers tend to have price targets for companies, and will be ready to strike when they think companies have been unfairly sold-off,” he said.
“Nick Kirrage and Kevin Murphy have a very good record as manager of the Schroder Recovery and Schroder Income funds. [Manager of the Investec UK Special Situations fund and Temple Bar IT] Alastair Mundy also has a very good reputation.”
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
The Investec and Schroder teams are highly established, and have attracted vast amount of assets as a result.
If you’re looking for managers with a bit more flexibility, George Godber and Georgina Hamilton have made a very good start running the £96m CF Miton UK Value Opportunities fund.
The £118m Jupiter Undervalued Assets fund, managed by Steve Davies, is another that’s growing in popularity.
Davies told FE Trustnet earlier this week that he is ready to pounce on cheap valuations in light of next year’s general election.