Investors say union will bring ‘relief’ to markets

The final build up to the referendum on Scottish independence saw sterling side while UK equities have experienced some of their own jitters but experts believe the decision by Scottish voters to remain as part of the United Kingdom can bring some welcome “relief” to markets.

Scotland voted 55 per cent to 45 per cent to remain as part of the United Kingdom in yesterday’s referendum on Scottish independence.

Both sterling and shares have taken several hits in the final weeks before the referendum as a number of polls showed the Yes campaign gaining significant ground, making the final outcome of the vote highly uncertain.

However following the eventual outcome of a substantial vote in favour of remaining in the United Kingdom, industry experts expect sterling and equities are likely to steady, although uncertainty could linger as additional powers to be given to Scotland as well as in England, Northern Ireland and Wales, are decided.

Saxo Bank senior market analyst Nick Beecroft believes the final No vote has seen a “tremendous source of uncertainty removed” from markets. He says: “If Scotland had voted ‘yes’, then many were predicting this could have been the ‘butterfly flapping its wings in the Amazon jungle’ that led to the long-awaited crash in equity markets and rise in volatility that has been curiously absent over the course of this summer.
“The converse is therefore now true; with this tremendous source of uncertainty removed, equity markets can resume their upward March, driven on by excess global liquidity- the US Federal Reserve may be turning off the taps, but the Bank of Japan is flooding the markets with money and the European Central Bank is moving inexorably toward quantitative easing.”

The outcome of the referendum should also see markets return to focusing on fundamentals, according to Sanlam head investment solutions Rick Eling. He says: “Now that the result is known – and the UK has survived- we expect fundamentals to reassert themselves on prices. 

“It was lost in the pre-referendum noise, but CPI fell again on Tuesday to 1.5 per cent, further weakening the argument for a rate increase.  The FTSE 100 has tried and failed five times in the last year to top 6900: this clearing of the air may be enough to push it onto new highs.”

Miton UK equity manager David Jane argues somewhat alternatively that although retaining the union brings “significant relief for markets”, further political uncertainty over the outcome of the UK general election could bring more turbulence for sterling.

He says: “The outcome of the Scottish Independence vote comes a significant relief for markets, particularly given that the result is quite clearly in favour of No with a very high turnout.  This removes one huge cloud weighing on sterling and as anticipated it has rallied over the course of the last two days.”

Jane continues: “Markets may end up concentrating on the impact of the concessions made during the No campaign, as well as the forthcoming general election, which may prevent long term sterling strength going forward.”

Newton Investment Management global macro strategist Peter Hensman goes further to suggest that the possible drag on economic growth created by this ongoing political uncertainty could postpone a potential interest rate rise by the Bank of England.

He adds: “In the near term, financial markets are likely to reflect once more investors’ expectations of interest-rate increases (which had been reversed during the latter stages of the referendum debate).

“Over the longer term, given the greater uncertainty for businesses, delays to investment decisions are likely to act as a drag on growth, undermining any expectations for higher interest rates and having a knock-on impact on sterling.”