Scotland the Brave (?) – September 2014

Scotland the Brave (?) – September 2014

So the answer to the most talked about question for the past year or more is known. The fact that the Scottish people elected to remain within the United Kingdom is probably not the eye-catching feature of yesterday’s referendum, but the margin of victory for the ‘no’ vote certainly is. News bulletins have been dominated in recent weeks by the narrowing margin in the opinion polls between the ‘yes’ and ‘no’ campaigns but once again the polls have proven to be erratic at best and unreliable at worst.

Markets reacted positively to the outcome, with Sterling flourishing, or at least regaining the lost ground of the last few weeks. Stocks with a high Scottish dependency or domicile similarly spiked up, but here again this represents playing ‘catch-up’ following the uncertainty of the past few weeks. Indeed one thing financial markets hate generally is uncertainty so the fact that we have clarity is a good thing. Or is it ??

As with most things in life, it is never that simple. One ‘condition’ attached to a ‘no’ vote was more devolved power for Scotland but just what this looks like is still very hazy. For the most part the Union has worked well and Scotland has prospered with income per head around the same as for Britain as a whole and Scotland generally the richest region outside London and the South East. Holyrood already controls health, education and transport but welfare and taxation is determined at a national level. The independent campaign has listed the things it would like control over, but this is likely to be a resource issue, or put another way, if the numbers stack up.

The exact shape of ‘Devo Max’ is still to be determined and although Holyrood is likely to be pressing London for rapid resolution our guess is this could take 12-24 months to operationalise, by which time there will have been a general election. It is also likely that Stormont will be watching the situation closely and we would not rule out some kind of ‘me too’ response from the Irish if devolved powers are seen to be generous.

CDC Comment: We have been quite cynical about what the polls had been telling us in the run-up to the referendum since surveys of this nature are often imprecise or have questionable sampling frames and this naturally leads to spurious results. That aside, we have been of the view that Scotland could prosper inside or outside the union. Opting out would have created short term challenges around currency, the central bank and the financial sector but the vote was as much about identity and values as economics. That said, we cannot ignore the economic issues.

The Scottish economy differs from the rest of the UK surprisingly little (which explains why the Union has worked so well) and despite the travails of the banks, the broader financial sector remains strong, as does tourism and the drinks industry. ‘Devo Max’ will focus on continuing to capture maximum value from these areas.

The issue of oil, not surprisingly, has been a key debating point but this is nothing new; the SNP’s 1970s campaign slogan of ‘It’s Scotland’s Oil’ lead to parliamentary seats and the promise of devolution plans, though it has taken 40 years for the referendum to materialise ! Oil revenues yield between £4-10bn and the two campaign camps have based their arguments on the extremes of this range but taking the mean position, amounts to about 5% of Scotland’s national income, less than many realise, and likely to decline further.

Overall the reaction of financial markets this morning confirms our belief that public enemy number one is uncertainty and today’s response appears to be one of relief. A ‘yes’ vote would have led to enormous upheaval both for governments and corporations and that invariably comes at a cost. Now planners can turn more of their attention to economic and business performance rather than issues of contracts and domicile, and there remain plenty of those to grapple with over the months ahead.

Andrew Mann Director of Strategy