A week that could set in motion the eventual collapse of the 314-year union between England and Scotland is concentrating City trading desks on market disasters ahead.
As Scots enter a May 6 vote pitched on whether there should be a second independence referendum, fund managers and sell-side strategists see potential for massive chaos across the UK’s economic landscape in the years to come. Yet in an echo of the early days of the Brexit poll, few are hedging for this disruptive prospect.
While the stakes could hardly be higher, it’s not clear the UK government will agree to another referendum, even if pro-independence parties win a majority. But with the vote stirring uneasy memories of Britain’s split from the EU, fund managers are dusting off old playbooks for how to trade a binary risk event where timing is everything.
“You’d have massive uncertainty, financial chaos and
recession,” and a 10% devaluation of the pound, said Mark Nash, a money manager at Jupiter Investment Management. Nash isn’t hedging such a scenario yet — and neither is the market. The median of forecasts in a Bloomberg survey has the pound holding at $1.39 through June. Still, a handful of investment analysts have ventured forth bearish calls.
Strategists at Credit Agricole SA recommend shorting the pound versus the dollar, with political risk over Scottish independence among the reasons. Barclays Plc abandoned a call to go long on the pound versus the euro on the potential for pre-election volatility.
Consequences of secession would be huge. Negotiations would be necessary over what currency an independent Scotland would use, whether it would take a share of the British national debt, and what trade arrangements it would have with the remainder of the UK. The Scottish National Party also harbors ambitions to bring Scotland into the EU, a situation that would create huge border and trade tensions, if the problem of ring-fencing Northern Ireland in Brexit is any example.