Investors had generally overlooked the September 18 Scottish independence referendum, pointing to the incessantly large lead enjoyed by the ‘No Camp’ as a primary reason not to worry.
However, last week’s survey changed all that by an opposition to the affirmative vote which implied that it can no longer be ruled out.
The most noticeable reaction came in the currency option markets where investors were on a frenzy to purchase protection against swings in sterling pertaining to the date of the vote which reflected hedging by both speculators and companies alike.
When there exists an archetypal polls that still have enough margin to see the possibility of an independent Scotland as a tail risk instead than a baseline scenario. However, when investors offset the same with the price of protection, it’s still worth having some of it in one’s portfolio.
Sterling declined approximately 0.6 % against a generally stronger dollar, but analysts said that they are anticipating the pound to plummet much more sharply in the likelihood of a Yes vote. A specific concern for currency investors would be Britain’s persistent account deficit, should it be longer offset by North Sea oil revenues.
There is a long position in the dollar as against the sterling as it appears to like the easiest and modest way to strategically win for independence, given that sterling is likely to weaken in a break-up scenario. In an event of a Yes vote, sterling could slide much faster from its present levels of 1.65 to the dollar of 1.50.
According to IG Index, it had received a bet of £50,000 on a Yes vote last week following the report on polls.
Gilts investors looked as if they were stagnant. Interest rates on 10-year U.K. gilts increased at an estimated 6 basis points to 2.349 % but there was very little improvement in terms of yields on shorter-dated debts with the Debt Management office considering the healthy demand of a £4 billion sale of bonds as a result of its maturity by 2020.
The effects of the Yes vote would definitely temper gilts and could possibly even unnerve international holders of U.K. debt with shares in companies with cross-border exposure also slipping last week with Lloyds and RBS banking Group being among the worst performers in a subdued London market. Moreover, SSE, the Scottish utility with extensive interest in Britain fell 1.6 % respectively.
Barclays equity research analysts have speculated that a Yes vote would somehow affect shares in several financial institutions including similar situated sectors including transport, defence, utilities, asset management property and insurance as well.
But, both the outcome of the referendum and the contentions of an affirmative vote still remains vague in which options for investors are restricted.
According to several hedge fund managers that had looked at trading Scotland could not gauge how the referendum would alter the gilt markets and sterling.
Finally, the outcome of the election still is uncertain and even if many would have a strong prediction as to the results of the referendum, it would still be very hard to make money out of it due to the difficulty of making out the certainty of future events.