Schroders: Scotland rejects independence

With an enormous turnout of 84.6%, the result of 55.3% for ‘No’ against 44.7% for ‘Yes’ was a larger gap than signalled by voting intention polls.

The news will come as a relief for investors and financial markets, reflected by an early morning bounce in the pound versus the euro and the US dollar. Indeed, sterling has risen from 1.62 against the US dollar at the start of the week to a peak of 1.65 this morning. The prospects of months of messy negotiations, uncertainty over the division of national assets and debt, and the currency arrangements of an independent Scotland had been weighing on the confidence of investors over the past few weeks, especially as polls had tightened.

Westminster is now expected to devolve more power to Scotland after a late promise by the leaders of the major Westminster parties. Variability in tax rates may introduce distortions at a micro level, but should have little impact to the overall macro economy. The result along with further devolution should mean that another referendum is very unlikely in the foreseeable future. However, long-term investors will be minded of the risk of separation and may demand a premium for undertaking fixed asset investments in Scotland going forward. 

Continuation of the union also means the risk of the UK’s exit from the European Union (EU) has been reduced, although does remain significant. Scottish residents are more in favour of remaining in the EU, compared to the rest of the UK where the majority favour an exit. Overall, major disruption has been avoided and focus can now return to building on the strong economic recovery in progress. The Bank of England is now likely to press ahead with raising interest rates early next year in the absence of political uncertainty.