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The Scottish Referendum and an Investment Portfolio

Unless you have been travelling the Silk Road or sailing across the Atlantic, you will no doubt have been following the referendum debate and narrowing polls in Scotland with interest.  Wherever your sympathies lie, it would not be unreasonable to have some concern about what this means for an investment portfolio if you are lucky enough to have one (or more).

As you are no doubt aware, financial markets hate uncertainty, and that is exactly what we have today (and will certainly have more of if the outcome is a victory for the ‘Yes’ camp).  As a result, we are likely to see some volatility in UK bond, equity and currency markets.  But this needs to be placed in perspective.  In a global context the ‘Yes’ or ‘No’ vote pales into insignificance relative to Russia’s covert war in Ukraine, or the threat of Islamic State in the Middle East, for example.  It is simply evidence of a civilised society executing its democratic process in a peaceful manner; something – in the greater scheme of things – to be proud of, whichever way it goes.  The Scottish vote is close to our hearts, but a side story for the rest of the World.  The World is and always will be an uncertain place and markets will respond to new information – good or bad.

In terms of an investment portfolio, if it is well-diversified globally across equity holdings, this should mitigate any shorter-term volatility in the UK equity market.  In addition, the non-GBP currency exposure that comes with non-UK equity allocation provides a hedge against any fall in the value of sterling against international currencies that may occur.

On the bond side, if an allocation is predominantly in high quality, short-dated global bonds this should also mitigate the risk of any rise in UK yields caused by uncertainty as a consequence of a ‘Yes’ vote.  If a portfolio includes index linked gilts, which are there to protect against long-term unanticipated inflation, remember that this still remains a risk whether Scotland remains part of the UK or not.

The temptation is to do something, but more often that not the best thing to do is to believe in a long-term, globally diversified structure, and ride out the uncertainty. ‘This too shall pass’ – as the legendary US investor Jack Bogle would say.  There will be bigger global storms than this in the future, although at the moment these are the grey clouds that we can see approaching from the horizon.

In terms of the detail about what happens to the currency, pensions, ISAs etc., on both sides of the border, let us just wait and see.  We will keep vigilant and keep you posted.  Please do call us if you have any specific concerns.


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