The City enters its final trading session on Wednesday before the Scottish referendum in a state of trepidation not seen since the unprecedented days of the global financial crisis.
With a last-minute welter of shrill warnings about the instability a Yes vote would cause to markets from insurance and banking to Scotch whisky and credit default swaps, many brokers and investors took the view on Tuesday that it was safer simply not to trade. The FTSE 100 index closed almost unchanged last night, down 0.18 per cent at 6,792.24.
Amid all this uncertainty, the Wealth Briefing research group highlighted that, for global investors, the UK has increased its unenviable status as the world’s least popular region to invest in this month, with a net 16 per cent of investors polled said their investment portfolios were “underweight” – under-represented – in UK shares.
Not only that, but the UK was the region global investors most wanted to be underweight in for the coming 12 months.
Furthermore, a net 20 per cent said the UK had the least favourable profit outlook, up from a net 12 per cent in August.
Investors ratcheted up their concerns about the impact on their investment decisions about backing Scottish companies.
Bill Morrow, a Scot who puts investors together with entrepreneurs at his networking business, Angels Den, said: “Most angel investors into Scotland are from south of the border. Of the 15 deals in Scotland we have arranged this year so far, all them came from English investors. The question is whether they will have the confidence to continue investing in an independent Scotland.”
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Key to much smaller investments would be the tax structure Scotland adopted, he said. Investors from the rest of the UK would be particularly worried about whether an independent Scottish government would continue the tax efficient Enterprise Investment Schemes.
However, others declared that regulation and taxation may not be such a big deal. With regards to financial regulation, Adrian Murphy, a partner at Glasgow-based Murphy Wealth, told Wealth Briefing that he did not see cross-border arrangements being an issue as Scotland would “essentially be using the same rulebook as the Financial Conduct Authority”.
He added that an independent Scotland could have a leaner, more efficient regulator than at present due to the smaller, less complex nature of financial services in Scotland.
Taking the macro view on the cost of Britain’s debt, a Bloomberg poll of analysts predicted a Yes vote would spark a sell-off of UK government bonds and push gilt yields to eight-month highs. Jason Simpson, UK rates strategist at Société Générale in London, explained that this was due to the “uncertainty perspective” for investors in the brave new world of a UK break-up.
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Another factor was the increased risk of the UK getting a worse credit rating if it lost Scotland, which provides about 9 per cent of its total output. Meanwhile, the likely prolonged negotiations on a settlement with a newly- independent Scotland could delay investment and en- courage people to pull their money out until they had seen the final shape of the various deals on currency, debt, Bank of England oversight and other issues.
The mechanics: Response to a yes vote
Banking sources said that in the event of a Yes result, the Bank of England would first issue a statement reassuring the markets and investors that it would remain the lender of last resort during the 18-month handover process. The Treasury might then issue separate reassurances, after which the major banks would do the same. Lloyds, RBS, Clydesdale, TSB and others would confirm their already declared plans to move their registered offices to London.
That process of transferring business through the courts under the Financial Services and Markets Act, which Lloyds has already been through with TSB, is likely to take 12 to 18 months. However, it could take longer due to the large number of cases. The Treasury is considering legislation to speed the process to meet the March 2016 deadline.