Why investors are paying attention to elections in Scotland

Investors are waiting for the final results of parliamentary elections in Scotland that could spark radical changes to the political and economic landscape of the United Kingdom.

A decisive victory from Nicola Sturgeon’s Scottish National Party, which wants to break away from the United Kingdom, could force a standoff with Prime Minister Boris Johnson. His permission is needed to hold a referendum in Scotland on whether to end the nation’s 300-year-old union with England.

Kallum Pickering, a senior economist at Berenberg, said that while the risk of Scotland exiting the United Kingdom remains low, a parliamentary majority for parties that support independence will “put pressure on UK parliament to agree to a second Scottish independence referendum.”

“Such a result could make waves in markets and reignite Brexit-style uncertainties about the economic and political future of the United Kingdom,” he added.

Johnson has so far refused a second vote, saying a 2014 referendum — in which Scots voted to remain in the United Kingdom — was a once-in-a-generation event. But in the short term, increased political friction appears unavoidable.

“Even when Prime Minister Johnson denies Scotland a second independence referendum, or employs more heavy-handed tactics to suppress ‘Scoxit’ sentiments, the rift between Scotland and England looks set to widen,” Stefan Koopman, senior macro strategist at Rabobank, told clients earlier this week.

Votes were cast on Thursday, with a final tally expected over the weekend.

Market impact

UK investors remain largely focused on the economic recovery from the pandemic now that Brexit is complete. The British pound has been trading at about $1.39 this month, up sharply from roughly $1.23 one year ago.

Still, financial institutions consider Scottish independence to be a key risk.

“Betting odds and polls currently see essentially even odds on whether Scotland eventually secedes from the United Kingdom, which is a bit higher than we would place the probability,” Jacqui Douglas, chief European macro strategist at TD Securities, wrote in a note to clients last month.

“But it is an event that has an uncomfortably high probability of occurring sometime in the next few years, and one that we cannot discount,” added Douglas.

UBS strategists don’t think Scotland is likely to gain independence before the middle of the decade, but even the possibility could weigh on the pound and stocks of companies that rely on the Scottish market.

The banks Lloyds and NatWest are both registered in Scotland and employ significant workforces there.

“We do not believe another referendum on Scottish independence is likely in the next couple of years,” UBS said late last month. “However, if it were speculated as likely to occur, this could lead to some weakness for some UK assets.”

Scotland makes up 8% of the UK economy.

“At this stage it is too early to estimate on impact of independence, but in economic terms, neither party will benefit from a separation,” UBS said.

Playlist