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UK “Not as we know it” if Scots say “Yes”

Scotland’s future will be decided on the 18th September

Ahead of the September 18th referendum, recent polls have agreed that the momentum is with the SNP.

The first TV debate (5th August) won decisively by Alistair Darling marked the high water mark for the Unionists “Better Together” campaign. The second debate resulted in momentum building for Independence. The UK government’s “Better Together” campaign must make their case ahead of the vote.

The quality of the debate has been weak. Business leaders have claimed to have been pressurised by the Nationalists to stay out of the debate and quiet on the risks. The SNP claimed they had legal advice supporting their thinking about Scotland’s position in the EU before it was revealed they had not received legal advice.

The details and fine print about future pensions, currency, share of the national debt, central bank/ central bank reserves, fiscal policy have not been credibly answered by the SNP. The SNP claim an independent Scotland would be able to use sterling notwithstanding the explicit rejection of this notion from all three major Westminster parties. This is understandable. No-one knows the precise answers now and everyone is flying blind on the details if the answer is “Yes”.

What is clear Scotland would have to reapply for EU membership, negotiate their accession, and joining the EU would involve a unanimous vote of approval from EU member states. When Commission President Jose Barroso made the legal reference points clear, the SNP claimed he was talking “nonsense”. The SNP has now picked up on the complexity of the EU issue apparently via press comment.

The “Yes” vote’s “Big Mo”

Screen Shot 2014-09-26 at 10.27.31

Source: YouGov

In the end the referendum vote is an emotional decision for most voters – many of whom will be younger voters less concerned about the economic factors. It is a chance for change and it will be meaningful change. The result will depend on the floating voter and is likely to be very close.

GDP impact and “uncertainty”

A Scottish departure would longer term, probably not make much difference in pure GDP terms – the UK economy currently c $2.44trn GDP includes an 8.8% Scotland ($216bn GDP) component. Assuming 3.2% Q2 GDP growth persists – by 2017 the remaining United Kingdom would have recouped the “loss” of Scotland.

However it would introduce a lengthy period of uncertainty as key issues were decided.

Key areas of negotiation/ uncertainty that would influence the sovereign debt rating of the UK and Scotland:-

A “No” vote would preserve the status quo with the carrot being the provisions of the Scotland Act 2012 adding powers to the Scottish Parliament including the ability to raise/ lower income tax by 10p, control of stamp duty and landfill tax and the creation of Revenue Scotland – a tax authority to replace the HMRC. Assuming the No vote wins the reward with be greater devolution of power to the Scottish parliament.

What sectors would be impacted ahead of separation?

Sector Short-term risk Long-term risks Comment
Aerospace/ Defence Negative sentiment Neutral Procurement outlook?
Banking Negative sentiment Neutral FX risks and new regulatory risks
Beverages Mixed Negative EU export issues
Fund Management Negative sentiment Neutral Fund flows uncertain
Oil& Gas Tax treatment of 24bn bbls of NS oil Fiscal incentives required for NS investment Petroleum Reserve Tax treatment
Property Negative sentiment Neutral New home sensitive
Utilities Regulatory uncertainty – Ofgem Highly Uncertain Possibly most exposed

A “Yes” vote would have the largest short-term impact on the Fund Management and Utilities sectors though this will abate over 2014/15 as key uncertainties are clarified.

What companies would be impacted ahead of separation?

In reviewing the impact on relevant listed blue chip companies, it is apparent that the Scottish referendum is a major issue for 2014/ 2015 in the event of a vote in favour of independence. That impact would abate over time as key uncertainties are clarified. Companies can mitigate their exposure, move their HQs and engage in tax arbitrage.

Company Short-term Long-term Comment
Aggreko HQ issue Neutral Limited relevance
BAE Systems UK MoD disarray will impact demand Positive Scotland new client
Barclays Low footprint relative to bank peers BARC has bigger issues on its plate! BARC have warned “new risks” of “Yes”
BP 90% of North Sea in Scottish territorial waters Neutral Would benefit from lower sterling v USD
Diageo £3bn Scot whiskey/ c.25% sales Small issue longer term £3bn Scot whiskey/ c.25% sales
First Group ScotRail exposure FGP leverage is main issue ScotRail franchise new regulatory risks
Johnston Press +ve for advertising/ rebranding activity Positive for JPR now 4p per share Running Scottish “Yes” website!
Lloyds Banking Scot Widows / BoS Significant impact Complicating for ops
Menzies High exposure to Scotland Neutral Increased FX risks/ operational leverage
Persimmon Sales impact Low 10% sales some risk
RBS Re-domicile to UK Neutral Unlikely to derail margin recovery
Royal Dutch Shell Low exposure £100bn investment plan for NS oil Would complicate assets and taxes
Stagecoach Family unlikely seller FX risks will rise Will impact business
Standard Life Strong numbers Limited impact Fund flow risk
Travis Perkins 8% sales in Scotland Neutral Limited overall risk

Possible approaches in the run-up to the 18th September 2014

With just 10 days to go……the Scottish referendum looks like a binary bet. Our expectations for the immediate run up period are as follows:-

Screen Shot 2014-09-26 at 10.26.29

Our expectation is the period in the run-up to the vote will be very volatile, poll sensitive and with heightened political risks.

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