How will the Scottish Referendum effect the stock market?

I’m sure like us, most investors will be concerned about the effect of the Scottish referendum on the stock market. It’s something we’ve given a lot of thought to. In this article we will be discussing how the Scottish Referendum could effect the stock market and what actions we have taken/will take ourselves.

For a long time the opinion polls seemed like a No vote in the Scottish Referendum was a no brainer, but in recent weeks the gap has narrowed and it has been virtually 50:50 all week. With many undecided voters still, the prospect of a Scotland-less Great Britain is looking like a real possibility and the markets have reacted to the uncertainty with fear, as in fact it does to uncertainty over anything.

Of course lets get the political part of the article out of the way with. All politically sensitive people look away for this bit:

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Not that my opinion matters but a) I am all for the Scots voting for independence but b) I think it’s potentially catastrophic for both them and for the rest of the UK. I certainly think it might be something they come to regret and that the rosy picture being painted by Alex Salmond is very far from what the true outcome will be. I think people in Scotland will be far worse off if the independence goes through and they have no idea what they are getting themselves into. It doesnt seem to matter how many well qualified people in finance and industry explain it to them, the Yes voters cant seem to understand that they have their numbers all wrong and that many areas of Scottish life will be poorer for being independent.

So why do I want to see the Scottish vote yes for independence? Well the answer is two fold. Firstly I actually think in the long term the rest of Britain is better off without them. The unbelievably sycophancy being shown to the Scots by the UK political parties is frankly turning my stomach, they are literally bending over backwards to keep them in the Union and offer them increased powers and money that is in no way fair to the rest of Britain. As it is the Scottish get a more favourable deal, I dont see why we should reward them for essentially trying to screw over and turn their back on the rest of the UK. Plus Scotland is a very socialist country, largely dependent on welfare whereas England is far more capitalistic and promoting of self reliance overall (though not without more than our fair share of scroungers ourselves). With such vastly different values the two parts are not that compatible as a whole. Socialism doesnt work, that’s why every time we get a Labour government they screw things up. We’re still paying the price of the last Labour government and have only now just about shaken off the recession they caused, just about in time for us to probably vote Labour back in again next year like the bunch of sado-masochists we are.. Self reliance, self motivation, and hard work is what makes people get on in life and that’s the value set that best serves Great Britain, if we could only just realise that we’d all be a lot better off.

The second, and frankly more interesting reason I want the Yes vote to win the referendum is that I believe it would present a massive buying opportunity. Sounds selfish I know and if my expectations are right its likely at the expense of the Scottish people probably going through a very tough time economically but at the end of the day if independence is what they want at all costs and that’s the price to pay then it’s their own choice and frankly I dont live in Scotland so my concerns are primarily in my own country of England.

Already the FTSE 100 and the currency market has reacted negatively to the possibility of a referendum. In the last 5 trading days the FTSE 100 has dropped from 6840 to as low as 6750. The $/£ exchange rate has dropped from over 1.7 in July to 1.63 today. Should the Yes vote win, these losses are likely to accelerate considerably, and of most interest to me that means that a) our existing US shares will be worth more in £s, b) our UK shares that operate largely in the US will be making more money and c) UK shares will all of a sudden be much cheaper to buy.

Let’s look at an example of how a fall in exchange rate will help us. One of our best US shares at the moment is the 3D printing company Stratasys. We bought in at $84.09 and they currently sit at $127.58 per share. Right now that $127.58 is worth about £78.27 per share but if the rate falls to say $1.5/£, then the same share is now worth £85.05.

Of course the possibility has been raised that a Yes vote could be the start of a new recession, so you might be waiting a while for those shares to turn into profit – but that’s what most good investors do: buy in on the lows and hold long term for the highs.

On my second point, UK companies who operate mainly in the US or who export to the US in the event of a sterling drop will find those dollar payments they are taking will be worth more to them when they land in the bank here in England.

Finally, of course you can rely on the stock market to react negatively to any bad news, negativity or uncertainty with a big old drop. And if the market corrects by say 10%, then that means you are able to buy stocks 10% cheaper than you could prior to the vote. And ultimately its a fairly safe bet that, like with any other major event that has caused stock market falls, the prices will eventually recover. It’s just a question of time.

So for the more patient, more contrarian and opportunistic investors amongst us, a yes vote could offer essentially a sale on shares.

So what if there is a no vote? I’m fairly sure a no vote would bring some relief to the market and in the short term at least a jump in share prices. Longer term is harder to say. A no vote still brings uncertainty because the seeds of rebellion wont just go away. It’s likely to be revisited again in future. In the mean time, Scotland would have a big power boost with probably protracted negotiations for years. So its still likely a no vote will see the market nervy in the mid term and there may be still a sizeable negative effect economically on the whole of the UK in coming years.

So what is our strategy this week? We will detail it a little more in our next article but primarily we are looking for prices to drop following a yes vote, and then we’ll aim to buy in at bargain prices when the time is right. If currency is very favourable then we might sell some of our US shares to make the most of that. If the vote outcome is no, then we will enjoy the bounce in share prices but we will be on the lookout for trouble further down the line.

As always please do your own research before doing any action in the stock market as your investment is always at risk, even more so during potentially volatile times like this week.