While factors like Scotland’s share of the national debt and what currency the newly independent nation would use are at the forefront of the argument, the farther reaching impacts have had little press, and could be far worse, say financial experts.
According to our own FE Trustnet poll, the majority of respondents – 65 per cent – would look to move cash out of investments with exposure to Scotland in the event of a “yes” vote.
However, given the potential impacts, where would be safe?“A “yes” outcome would have significant ramifications not just for the United Kingdom but for all of Europe,” said US-based economic commentator John Mauldin.
“There will be a big bill to be paid before everybody gets to leave the restaurant. Just who ran up what part of the tab over the last 300 years is an issue that has the potential to turn into a rowdy soccer – pardon me, football match.”
Mauldin says the cracks are already beginning to show in Europe.
Spanish bonds, for example, are beginning to fall as investors worry what precedent an independent Scotland would set for the Catalan region, anxious to leave the rest of Spain behind.
Chris Iggo, head of fixed income of Europe and Asia at AXA Investment Managers, says so far the question of Scotland has been an “irritating distraction” for bond markets, but warns the distraction could become a “much more important trigger for volatility”.
“I’m not sure what the market reactions will be if the “yes” vote prevails but we saw glimpses of what this could be last weekend,” he said.
“The pound is likely to drop, equities may suffer and gilt market volatility will rise because of the potential selling from overseas investor and the potential revision of Bank of England interest rate expectations.”
“There are plenty of conditional risks stemming from a “yes” vote including the political uncertainty in the UK – the future of David Cameron, the role of the monarchy for example – uncertainty about the UK’s position vis-à-vis the European Union and the potential for encouragement for separatist movements elsewhere, such as in Catalonia.”
BlackRock’s Russ Koesterich suggests now might be a good time for cautious investors to offload European assets given the uncertainty likely to hit the region in the event of a “yes” vote.
“What are the ramifications if the Scots vote "yes" for independence? Obviously, the vote is most important for the UK, but Scottish independence would have broader significance as well, particularly for the rest of Europe,” he said.
“At the very least, sterling and other UK assets would likely come under additional pressure. In addition, given that Scotland is typically more pro-European Union than the rest of the UK, a departure could raise the odds of an eventual UK exit from the EU, which would only add to uncertainty in the region.”
“For now, our vote is on a narrow victory for a continued union, but should Scottish independence prevail, investors should prepare for some uncertainty for the broader European Union.”
George Friedman, chairman of US global intelligence company Stratfor, paints an even bleaker picture of what may happen if Scotland walks out the door.
“If that centuries-old union can be revised, then anything can be revised,” he warned.
“Scottish separatists' reason for splitting is that they are a separate nation, that each nation has the right to its own state and the right to determine its own destiny, and that they no longer choose to be in union. But if they have the right to determine this, why shouldn't others in Europe enjoy the same right?”
Freidman points to Spain as the most likely domino to fall next, but he goes a step further than this.
“If Scotland can leave the United Kingdom, then why shouldn't Catalonia be allowed to leave Spain? Farther east, the Treaty of Trianon gave Romania and then-Czechoslovakia large portions of Hungary along with the Hungarians living there. Why shouldn't Hungarians living in those territories have the right to rejoin Hungary?”
“Meanwhile, if French-speaking Belgians and Dutch-speaking Belgians wish to part ways and return their two regions to their respective countries of origin, why should they not be allowed to? And why shouldn't the eastern part of Ukraine be allowed to secede and join Russia?”
Other financial experts have raised concerns that even Asian economic powerhouse China could begin to break apart; however, Newton Asian Income manager Jason Pidcock (pictured) says the ripples of a Scottish “yes” vote aren’t likely to reach Asia’s leading economy.
“I see zero chance of any parts of China breaking away – for the simple reason that it's not a democracy and won't be for some time,” he said.“There is no way the central government would allow the type of referendum due to take place in Catalonia in November, let alone one which will be respected by the government, as in Scotland's case.”
Unlike the developed world, which looks poised to draw more borders than they erase, Pidcock thinks China is still in a land mass expansion phase, even suggesting the already massive country will swell to swallow parts of territory currently controlled by Moscow in eastern Russia.
“The Russian economy is on the brink of collapse. Putin will very likely be pushed out of power within the next 3-4 years and his successor, or the one after that, may calculate that it's better to sell territory to China, as Russia sold Alaska in 1867, than wait for it to be taken,” he said.
“Russia does not have a large enough economy or population to protect its existing eastern borders for much longer and, as Putin is now discovering, nuclear weapons alone do not make you a world power.”
Given all these uncertainties, it can be difficult to know what to do with your investments.
Alan Miller, chief investment officer at SCM Private, offers some tried and tested advice: “There is only one sensible solution in investment terms and that is to follow the Nobel Prize winner, William F Sharpe and apply three principles: diversification, diversification, diversification,” he said.
