The Impact Of Scottish Independence On UK Companies

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The most recent TNS Survey showed today that while 38% of Scots are in favor of Scottish independence, 39% are against – sparking speculation that the referendum on September 18, 2014 may be heading for a photo finish. The ‘ayes’ appear to have dramatically swung the odds in their favor, having gained a 6% swing compared to an earlier opinion survey.

“This poll reveals a remarkable shift in voting intentions, but the signs were evident in our last couple of polls which indicated a narrowing of the No lead, especially amongst those who told us that they were certain to vote,” Tom Costley, Head of TNS Scotland. “It is too close to call and both sides will now be energized to make the most of the last few days of the campaign and try and persuade the undecided voters of the merits of their respective campaigns.”

Scottish Independence: September 18, and thereafter

Assuming that the Scottish people do vote in the majority to become independent from the UK, Scotland is likely to become a separate country on March 24, 2016, as per the current plans of the Scottish government, and according to a research note of July 28 from Barclays.

Barclays UK equity strategy analysts Ian Scott, Dennis Jose, Joao Toniato and Jason Hart estimate that Scotland will likely iron out the modalities of the separation from the UK, membership of the EU and other organizations such as NATO in the intervening period, and will probably hold its first elections to an independent parliament by May 2016.

Scotland and the rest of the UK: comparative statistics

According to the research note, Scotland accounts for 8.1% of UK’s gross value added. 65% of Scotland’s exports are destined for the rest of UK, while the latter’s exports to Scotland are 19%. Other relevant statistics are shown below:

Impact of Scottish Independence on UK companies

“A ‘Yes’ vote in support of Scottish independence on 18th September could have a modestly negative impact on the UK stock market,” says the Barclays research note. “Although Scotland only accounts for c.2% of FTSE 350 sales, independence would present several companies with significant challenges.”

That said, it is interesting that the performance of certain Scottish-based companies, relative to the FTSE 350, has remained more or less flat after the announcement of the referendum on Scottish independence, as shown in the chart below, and suggesting “very little if any obvious impact on performance for this group.”

Scottish Independence stocks-flat

The analysts have identified key areas that could be impacted by a yes vote and the sectors within those areas that are likely to face the brunt of that decision.

Scottish Independence Impact-areas

How certain major sectors would be affected by Scottish Independence: Banks

According to Barclays analyst Rohith Chandra-Rajan, banks would face substantial risk from potential currency fluctuations in case Scotland were to adopt its new independent currency. Another disadvantage for banks could stem from a higher risk premium attaching to Scotland’s interest rates, as well as the non-availability of the Bank of England as a lender of last resort. “With the UK government estimating that Scottish bank balance sheets are 1200% of GDP, there is likely to be uncertainty as to whether a Scottish Central bank can provide a meaningful funding backstop,” says Chandra-Rajan. Another question: how will the UK government’s ownership of 81% of Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) and 25% of Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) be split?

Food and beverage (read: Scotch whiskey)

The fallout from Scottish Independence is rather negative for whiskey manufacturers such as Diageo plc (ADR) (NYSE:DEO) (LON:DGE) and Pernod Ricard SA (EPA:RI), says Barclays analyst Simon Hales. “Scotch whiskey is Scotland’s second-largest export industry of oil and gas, with over 90% of volume sold outside of the home market,” he says. “Given the dominance of the category, Diageo and Pernod Ricard are arguably the stocks with most to lose from a move to independence.” Other risks come from a failure to gain admission to the EU, and the resultant danger of losing Scotch whiskey’s geographic indication status.

Transport (particularly airlines)

Low-cost and leisure focused carriers operating out of Scotland are likely to benefit from the Scottish government’s assurance that it will halve the Air Passenger Duty.

Oil and gas production and services

The sector is afflicted by uncertainty following Scottish independence, particularly the fiscal arrangements relating to splitting of revenues after the installation of a new maritime border. “While we feel this uncertainty may hinder investment in the near term, in the longer term it is clear hydrocarbon development will be a key part of Scottish fiscal revenues – whichever country’s revenues that may be – and, indeed a new independent Scotland may have conditions that ultimately encourage activity” say Barclays analysts Lydia Rainforth and Mick Pickup.

Asset management

Though there is uncertainty over regulatory and tax issues, particularly relating to personal savings products such as ISAs, analyst Daniel Garrod doubts that “any uncertainty over the continuation of these arrangements in Scotland post the referendum will have a material impact on the prospects for fund management companies,” referring to the increase in the UK’s ISA limits effective July 2014.


This sector will be affected by both tax policies as well as currency concerns. Individual taxation norms specially relating to savings and pensions will be a key issue, while currency exposure could arise from the regulatory need to hold their asset reserves against Scottish liabilities in the new Scottish currency.

According to analyst Alan Devlin, Standard Life, which is headquartered in Scotland, will undergo much higher pain from currency, regulation and tax issues, because 90% of its earnings are generated outside Scotland. He points out, however, that the insurer has already incorporated companies in jurisdictions outside Scotland for transferring businesses if so required.

Defence and aerospace

This sector would face a negative fallout depending upon the U.K.’s decision on whether to repatriate the defence capabilities located in Scotland (such as those of BAE Systems and Babcock) or depend upon importing this infrastructure from a foreign nation. In the latter case, Scotland would face competition from several other nations.


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