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Scottish Note

Sarah Willis is a writer and editor specialising in business, finance and investment.

The outlook for the Scottish economy in the event of a Yes vote was bleak. Pundits warned of unsustainable welfare bills, insufficient revenue from North Sea oil, and the risks of ceding any sort of control over monetary policy to a Westminster that no longer had any vested interest in the economy north of the border.

As the Yes campaign gained momentum in the closing stretches, investors both professional and individual rushed to get their money out of Scotland. So, predictably, the initial reaction to a No vote has been a collective sigh of relief from the markets. The pound is already rallying (to the dismay of exporters) and money is making its way back to Scotland. In the short-term, normality is returning to the market.

But this is far from the end of it. It would be naïve to think that things will just go back to normal, as if the referendum never happened. The consequences aren’t necessarily bad for investors – after all, as Warren Buffet says, “profit from folly rather than participate in it” – but there are certainly ramifications that will reward close attention.

It’s not over yet

Yes, Salmond is stepping down, and the 55-45 result was more decisive than feared – but the fact remains that nearly half of Scotland voted for independence when given the chance. That’s not going to go away.

Salmond was very careful to word the vote as a “once in a generation” chance, rather than do what the Better Together campaign did and paint it as permanent. As he pointed out in The Independent, there was a clear preference for independence amongst Scots under 55, implying it’s only a matter of time before it all comes back around.

And then there are the negotiations over Devo Max. Although the exact details remain a mystery at the time of writing, Scotland is almost certain to have more control over income tax and at least some aspects of welfare spending. There’s no doubt this will have economic consequences for Scotland – and the rest of Britain.

The English question

Strictly speaking, there are actually two English questions. The first is the resentment of the extra powers being handed to Scotland – seen by some as a reward for rocking the boat, like giving in to a toddler’s tantrum in the supermarket. There are demands for English MPs only to have a say legislation that affects just England.

It seems unlikely this will happen. Firstly because it’s attaching a post-vote string to what was meant to be a no-strings promise pre-referendum. Secondly because Labour have too much of an interest in maintaining the status quo. If shire Tories get their way, Labour lose the influence of 59 Scottish MPs on English votes, rendering them next to powerless on England-only matters, spelling disaster for them at the next election. Why vote for a party that could never get anything done?

The second English question is the possibility of demands for further devolution. During the independence campaign, a groundswell of support emerged from the northern-most reaches of England, swayed by Scottish protestations of London-centric funding and government. The noises from Westminster so far seem to be supportive of further devolution. The immediate economic consequence of which would be, as Lena Komileva put it in the FT, a diversion of “more UK fiscal revenues towards regions, especially the north, without growing the total UK budget. Fiscal devolution would mean greater austerity pressures on Westminster”.

The European question

Again, there are two European aspects to the Scottish No vote. The first is the short-term calming of independence attempts on the continent – in Catalonia, Flemish Belgium, Sardinia and Venice – all of which would no doubt have been fuelled by a successful Scottish breakaway. Arguably the damage has already been done, each region encouraged that the Scots made it as far as being granted a vote, meaning that European independence movements are still a concern.

The second is the in/out referendum on EU membership scheduled for 2017 if the Tories win next year. The Scottish Yes campaign very rightly claimed that, should the UK vote to leave the EU, it could be grounds for returning to the independence question.

Constitutional volatility

So what does this all mean for investors? Simply this: the No vote does not signal the end of constitutional uncertainty for the UK and elsewhere. It has merely elongated it. The wildfire has petered to a slow burn.

Such political uncertainty is sure to translate into corresponding market volatility. It may not be drastic – the UK market is commendably international, and markets have successfully shrugged off bigger issues such as Ukraine – but devolution is now something of a Damocles sword over the City.

But to return to Buffett, that volatility is not necessarily a bad thing. Long-term investors see it as a blip at worst, an opportunity at best. Short-term investors certainly stand to profit if they handle it correctly. The wide-ranging consequences of the no vote have simply created a panoply of situations that require preparation and reaction.

As Tom Stevenson of Fidelity says:

“With volatility likely to rise, a reasonable cash reserve to take advantage of temporary dips in the market makes sense. Lack of visibility in markets also argues for a well-diversified portfolio, with a good spread between asset classes and geographical regions.”

All of which sounds like good advice, but good advice that applies at most times – referendum or no.

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