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Investors urged to buy British assets ahead of referendum

Example of Quebec in 1995 shows that if ‘no’ vote prevails assets will bounce back

Former Prime Minister Gordon Brown delivers a speech to a packed room at Scottish Labour campaign headquarters in Glasgow yesterday. Ahead of the referendum on independence, British assets have slumped. If the ‘no’ vote prevails however, assets could bounce back. Photograph: Mark Runnacles/Getty Image
Former Prime Minister Gordon Brown delivers a speech to a packed room at Scottish Labour campaign headquarters in Glasgow yesterday. Ahead of the referendum on independence, British assets have slumped. If the ‘no’ vote prevails however, assets could bounce back. Photograph: Mark Runnacles/Getty Image
Wed Sept 10 2014 - 08:29

If Quebec history is a guide, investors should consider buying British assets ahead of Scotland's independence vote, Nomura Securities said.

Losses in British shares and the pound as the September 18th Scottish referendum approaches with the Yes side ahead in the polls will be quickly reversed if the No vote prevails as it did in Quebec in 1995, Charles St-Arnaud, senior economist and strategist at Nomura in London, said in a note to clients.

“Most likely you’ll have a victory for the No with a very thin margin, so it’s probably a good idea to buy assets now while they’ve come down a lot,” St-Arnaud said in a telephone interview. “We’ve seen a correction in most of the assets, and if you have a victory you’ll have a nice bounce back.”

The province of Quebec held a second referendum on sovereignty on October 30th, 1995, after rejecting it in 1980. Those in favor of separation pulled ahead in polls about two weeks before the vote, just as they have now done in Scotland. The threat of Quebec sovereignty weighed on Canadian assets. The Canadian dollar dropped about 1.6 per cent against its US counterpart in the month leading up to the vote, while shares on the Toronto Stock Exchange declined about 3.3 percent. The yield on the 10-year Canadian government bond jumped as much as 42 basis points in the two weeks before. All promptly reversed course after the No side won with 50.6 per cent in a cliffhanger that showed most of the undecided ended up voting for the status quo, said St-Arnaud, 37, who was in high school in Quebec at the time.

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Key UK assets seem to be following a similar pattern. The pound has dropped 1.4 per cent against the US dollar since a YouGov Plc survey for the Sunday Times on September 6th showed Yes voters in the lead for the first time at 51 per cent, while the No side dropped to 49 per cent, when undecided responses were excluded. The yield on the 10-year UK government bond, meanwhile has widened about 15 basis points since mid-August, while the FTSE 100 benchmark share index has been more sanguine, slipping 0.7 per cent in the last three days. “Given how tight the polls are, the actual result will likely be decided by the undecided, who for aversion to risk may be more likely to vote for the status quo,” St-Arnaud said his note. The pound, which was quoted at $1.61 at 5 p.m. in New York could “easily have a bounce back to $1.65 or beyond,” St- Arnaud said.

There are notable differences between the circumstances of the Quebec vote and the Scottish one, St-Arnaud said. Most importantly, Quebec accounted for 22 per cent of the Canadian economy in 1995 while Scotland is estimated to represent about 7 per cent of the UK economy. As well, the Bank of Canada was actively intervening to prop up the currency at the time, St-Arnaud said.