Investment Strategies
Citigroup Warns That Investors Are Underpricing Risk Of "Yes" Vote For Scottish Independence

As the date of the referendum on whether Scotland should become a fully independent nation draws near (18 September), economists and analysts at Citigroup argue that investors are under-pricing political risk of such an outcome.
As the date of the referendum on whether Scotland should become a
fully independent nation draws near (18 September), economists
and analysts at Citigroup argue that
investors are under-pricing political risk of such an
outcome.
In a note from Michael Saunders, Tina Fordham and Jamie Searle,
they argue that Scotland has a relatively weak fiscal position at
present; there are concerns about what sort of currency the
country would adopt if Scottish voters chose to say “yes” to
independence. The trio argue that the current pro-independence
government in Edinburgh – in the devolved system – are seeking a
policy of “sterlingisation” in which any independent Scotland
would continue to use the pound. But even advocates of such an
idea, Citigroup have noted, say this isn’t a long-term solution.
It has been argued that while Scots could use sterling in
financial dealings, Scotland would no longer have any say in who
sits on the Monetary Policy Committee of the Bank of England.
Scotland traditionally has had a large banking industry. The
parent of the private bank, Coutts, is Royal Bank of Scotland and
as it name clearly spells out, a significant institution in that
jurisdiction. Standard Life Wealth is part of Standard Life,
which is headquartered in Scotland. The country is also home to a
number of asset management and boutique wealth management
organisations.
Citigroup argues that a “no” vote — which it thinks is by far the
most likely outcome – will reduce some near-term uncertainties;
such a vote is probably already fully discounted in government
bond prices.
“A `no’ vote probably would be followed over time by further
devolution for Scotland within the UK. Support for independence
probably would not vanish and this year’s referendum would be
replaced by a scenario of `neverendum’. Conversely, a ‘yes’ vote
would be a huge surprise and create significant near-term
uncertainty over both the economy and political risks. Concerns
that the remaining UK will be hit by a ‘debt shock’ would likely
prompt an initial reaction of bear-steepening and cheaper 30-year
gilt-swap spreads,” the bank said.
"Even if the Scottish referendum does not pass, the UK political
landscape is likely to remain in a state of flux. With the
combination of a likely enduring Scottish independence movement,
the rise of UKIP as a political force, the moderate-to-high
probability of a change of government in 2015 elections, and the
non-negligible risk of a referendum on UK exit from the EU in
2017, we believe that UK political risks are under-priced,” it
concluded.