Scotland’s decided to reject independence from the U.K., and that’s shored up British stocks.
However, worries over future constitutional changes have kept a lid on a relief rally.
With all 32 Scottish councils having declared, the No campaign won 55.3% of the votes cast in Thursday’s referendum, against the remaining 44.7% who backed independence.
The victory margin was wider than expected since most opinion polls were predicting a narrower 4-point victory for proponents of the union with England, Wales and Northern Ireland.
The FTSE 100 index of leading British shares was up 0.7% in late morning trading as investors breathed a sigh of relief. That’s because a Yes vote could have introduced a several economic issues.
As well as worries over what currency an independent Scotland would use, investors wondered how the U.K.’s 1.3-trillion pound debt would be split.
There were even fears that a Yes vote may have triggered a bank run—Bank of England Governor Mark Carney even flew back early from a summit in Australia.
“It might not have been financial meltdown territory, but the markets almost certainly would have been in turmoil this morning if the Scots had voted yes,” says Dennis de Jong, managing director at UFX.com.
Companies with Scottish connections outperformed the general market. Among them, Royal Bank of Scotland PLC was up 3%, while Lloyds Banking Group PLC rose 1%. Oil giant BP PLC, which has sizeable operations off the shores of Scotland, was up 1.1%, too.
Royal Bank of Scotland, which is majority-owned by the U.K. government since receiving a bailout during the financial crisis in 2008, said it was abandoning a contingency plan that included moving its head office down south to England.
“That contingency plan is no longer required,” the bank said in a statement. “Following the result it is business as usual for all our customers across the U.K. and RBS.”
In the currency markets, the pound was faring less well than stocks, partly because it had already rallied strongly this week on expectations of a No vote.
Having earlier risen to a two-year high of 1.2817 euros, the pound settled around the 1.2734 euro mark, largely flat on the day. Against the dollar, the pound was down 0.3% at $1.6390.
Uncertainty over the pound was likely a key element in the No campaign’s victory. Last week, the pound took a battering after opinion polls indicated the vote would be closer than anticipated.
A key concern had been what currency an independent Scotland would use. The Yes campaign had hoped it would still use the pound through a currency union with what’s left of the U.K., but the main British political parties insisted that wasn’t going to happen.
“There is nothing like uncertainty about the money in your pocket to sharpen the minds of voters,” said Derek Halpenny, head of global markets research at the Bank of Tokyo-Mitsubishi UFJ.
Now that the independence issue has been resolved, the focus in markets is swiftly moving on. Late on in the campaign, Scotland (which has its own Parliament responsible for a wide array of policies such as health and education) was promised further devolved powers from London.
Cameron had stated he wanted to create a “balanced settlement, fair to people in Scotland and…to everyone in England, Wales and Northern Ireland as well.” This suggests more reforms are likely to be proposed as part of a broad-based constitutional rejigging in the U.K.
“The Scottish referendum may be over, but political uncertainty is here to stay in the U.K.,” says Kathleen Brooks, research director at Forex.com. “Markets tend to be fearful of political uncertainty, especially when it could change the political landscape in a major global power like the U.K.”
Europe’s investment outlook
Prior to the release of the vote results, Portfolio Management Corp’s Darren Sissons noted Europe would have remained attractive from an investing standpoint regardless of the outcome of the referendum vote.
Sissons, a managing director at the firm, predicts there’s strong upside potential in European banks, industrial and energy companies, in particular.
“Asia is likely going to flat-line this year, while the U.S. is going to have to manage on its own without additional Fed stimulus,” says Sissons. Still, “with optimism in North America at a peak and pessimism in Europe arguably at a trough, now is the time to be looking at European equities.
“European equities appear reasonably valued at the moment,” and he finds the strengthening of the U.S. dollar will work to magnify European dividends even more over time.
For Canadian investors in particular, says Sissons, dividends from Europe stocks could be particularly robust as the loonie slides back to $1.50 per U.S. dollar, and as it declines versus the euro and the pound.
Further, he forecasts that ongoing economic recovery throughout the Eurozone, coupled with renewed efforts to keep rates near zero and boost liquidity, will continue to make the region’s equities attractive.
“The…uncertainty surrounding the referendum has had very little to do with the [solid] fundamentals currently at play” in Europe, says Sissons.