Following the No vote in yesterday’s Scottish Independence referendum, BNY Mellon boutique investment managers Insight Investment and Newton comment on continued uncertainty for businesses, why Insight hold a modest negative view on UK gilts and why Newton expects the market to rally.
Peter Hensman, global macro strategist, Newton Investment Management and Paul Brain, head of fixed income, Newton Investment Management
While the ‘No’ result in the Scottish independence vote eases some of the immediate uncertainty that would have stemmed from the end of the 300-year-old union, the fallout from the closeness and tension of the final stages of the campaign is likely to be significant.
Political uncertainty is likely to persist as the panicked promises of greater devolution of power to the Scottish parliament will now have to navigate passage through parliament. Not only will other regions within the UK be concerned to ensure they receive something in return for their support of devolution, but the SNP and UKIP will undoubtedly be emboldened in their expectations for greater gains in the General Election scheduled to be held in May next year.
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. Although a weaker pound will help boost the translation of overseas earnings, the influence of this ‘No’ vote on different equity sectors should prove less dramatic than a ‘Yes’ vote would have been. Most obviously, the stocks that had been negatively affected by the feared consequences of a separation should see their discount close. Beyond this, the risk of windfall taxes is likely to have increased too, if the necessity to encourage support for devolution leads to an increase in fiscal give-aways.
Andrew Wickham, head of UK and global fixed income, Insight Investment
The nays have it. Scottish voters decisively backed the ‘No’ campaign to keep their union with the rest of the UK intact. Financial markets that largely ignored the threat of a vote for independence can breathe a sigh of relief. Apart from some short-lived pressure on sterling, UK government bonds and equities were largely unmoved as Scotland’s fate was awaited. Insight Investment currently holds a modest negative view on UK gilts owing to our view that markets are not fully pricing in a rate hiking cycle that is set to begin next year. That story has not changed in light of the outcome of the Scottish referendum. However, a broader UK constitutional settlement has not been resolved and that could yet cause uncertainty.
Gareth Colesmith, senior European portfolio manager, Insight Investment
Other separatist movements in Europe, particularly in Spain, have been emboldened by the strong momentum the pro-independence lobby achieved in Scotland and, as a result, peripheral spreads widened slightly in the run-up to the vote. With the outcome in Scotland now known, peripheral spreads could start to tighten. But the push for independence by nationalists in regions such as Catalonia and the Basque country will remain a live issue into November, when Catalan separatists plan to hold a non-binding vote on independence. The Spanish government would seek to declare any vote as illegal in its Constitutional Court. This degree of opposition combined with the latest raft of policy measures unleashed by the European Central Bank is likely to reinforce a tightening bias in peripheral spreads.
Paul Stephany, UK equity portfolio manager, Newton Investment Management
Our feeling is that the market should rally from here, given prior fears over capital flight, and the key uncertainties around currency and taxation. Oil companies like BP and those that service them like Wood Group can now concentrate on their day jobs rather than contingency plans, with clarity over tax regimes critical to getting the most out of what’s left in the North Sea. The financials sector should also benefit as worries recede. For example, the share prices of Standard Life and Lloyds are likely experience a bounce. Post this fascinating and historic interlude, we wake up today and still have the United Kingdom as home to the world’s third largest stock market and a global financial centre. For now at least, stability is returned, and that is what markets crave most of all.