Scottish referendum: Scotch mist clears
UK stocks and pound boosted by Scottish vote.
- Potential political and market turmoil averted.
- UK currency, equity and bond markets rally after result declare.
- UK economy’s momentum to be maintained.
Financial assets and the pound have rallied strongly as markets concluded the Scottish electorate’s vote against independence had reduced investment risk. Given the extent to which UK equities have lagged their European counterparts in recent weeks we believe the rally in stock prices could have further to run.
The risks posed to financial markets were first exposed earlier this month when an opinion poll revealed a surge in support for the independence movement. Uncertainty as to exactly what a ‘yes’ vote might mean for financial markets pushed both sterling and UK stocks sharply lower.
But while UK equities have responded positively to the vote, it should be remembered that prior to today they had underperformed European peers by five per cent over the last month. As such we see scope for further gains.
Prior to the vote the danger of runs on Scottish banks potentially triggering wider market panic, had been very real. And a yes vote could have led to a slowdown in the UK economy as companies deferred investment and households reined in spending. Such an outcome would have led to increased political uncertainty too ahead of a general election next year.
Prime Minister David Cameron has confirmed the proposed timetable to devolve more powers to Scotland. Negotiations over the level of fiscal and public spending powers granted to Scotland are likely to be fraught. However, the overall effect on the UK’s public finances is likely to be limited.
In the meantime, shares should be supported by a brighter economic backdrop. We expect UK economic growth to be among the strongest in the developed world this year at around three per cent.
Prospects for commercial property and corporate bonds are reasonably encouraging too.
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