The results are in. We’re still a United Kingdom.
Despite the major last-minute panic over the past few weeks, it turns out the market was right to have largely ignored the independence referendum in the months leading up to the vote.
With the final count showing a 55% ‘No’ vote to a 45% ‘Yes’, and on a massive 86% turnout, it was a comfortable win for the union, if not exactly a landslide.
So what happens now?
The relief rally is underway
As you might expect, most of the assets that have been hit by fears over Scottish independence – the pound, the FTSE 100, Scottish-linked stocks and investment trusts – have rallied on relief that the UK has won a convincing endorsement.
All the obvious big risks – such as rampant capital flight, a currency split, and extreme political upheaval – have been avoided.
Economically, this is good news for Scotland – certainly in the short term. Business projects that have stalled will start up again. Property sales that had been postponed will now go through. You can probably expect a bounce in both the level of sales and in prices achieved.
It’s good news for the UK too, although a little double-edged. The Bank of England now has little excuse to push back raising interest rates, for example. So as it stands you can probably still expect that to happen in the first half of 2015 at some point.
However, it would be a mistake to think that this is all over, just because the votes are in and counted.
There will be political fallout – potentially quite substantial. And that’s something investors at least need to be aware of.
The debate has stirred up a hornets’ nest of questions about the way Britain is run, one that had largely gone ignored. The promise of more power for Scotland – even in the event of a ‘No’ victory – means that Britain’s whole political structure is going to need a rethink.
While plenty of ‘Yes’ voters seem concerned that the UK parliament will back down from ‘Devo-Max’ promises, that seems unlikely. After all, whatever Alex Salmond said about this being a once-in-a-generation opportunity, he’d easily be able to argue the case for a re-run if anyone reneges on the deal.
To be clear, Scotland already has a lot of power, as Sarah Neville points out in the FT. It has full control over the NHS in Scotland (see here for more), which is why it’s baffling it was such a feature of the SNP campaign. Same goes for education. Major changes in both fields that have been introduced in England since 1999, have not been adopted in Scotland.
And Scotland is already on track to get major new powers. From April 2016, the Scottish government will be able to move income tax rates by up to ten percentage points, for example.
The big risk with that is very similar to the threat posed by an independent Scotland remaining in currency union with the UK. It’s the danger of having part of the country with almost total control over revenue-raising and spending powers, and the reassurance of a bigger neighbour to bail it out if it over-reaches itself.
As Melanie Baker of Morgan Stanley put it in the FT, this “might end up having broader implications for the health of the UK’s fiscal finances”. At a time when we’re already very heavily indebted, that’s not a pleasant prospect.
Expect a lot more political turmoil ahead
Meanwhile, we’ll move that bit closer to having a separate English parliament. David Cameron has said he plans to address the problem of Scotland-based MPs being able to vote on issues that only affect English voters.
In short, this has seriously shaken up UK politics. So what does it mean for UK investors?
Clearly, we’re still not keen on gilts – Britain is heavily indebted and potentially facing rising interest rates, so we’re not big fans in any case. The pound – it may rally a bit, but much of its recent fall has been down to the stronger US dollar, so don’t bet on a huge rebound.
Meanwhile, other safe haven assets – particularly London property (see my colleague Dominic’s piece from yesterday for more) – may have peaked. We’re now just a few months away from a general election, following a divisive, bitter campaign in which none of the major parties have covered themselves in glory.
Both David Cameron and Ed Miliband look even more like fools than they did before. And arguably, Ukip’s position is stronger than it was, too. That means a lot of political uncertainty ahead and plenty of scope for unexpected taxation and short-term populist decisions being made on the hoof. And that never makes for an attractive investment environment.
We’ll have more on the fall-out in next week’s edition of MoneyWeek magazine. If you’re not already a subscriber, get your first four issues free here.
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