By Josie Cox and Tommy Stubbington
Surging support for Scottish independence ahead of a referendum
next week roiled markets Monday, sending the British pound sharply
lower and pummeling stocks in banks and other businesses likely to
be most affected by a victory for the separatists.
The turmoil came after a poll over the weekend showed that the
number of those favoring Scottish independence had eclipsed those
opposing a split, a dramatic shift from a few weeks ago when the
pro-union campaign held a strong lead.
"The vote has moved from being something three or four weeks ago
that we didn't need to focus on, to something we need to think
about [in terms of] how it affects our portfolios," said Paul
Lambert, head of currency at Insight Investment, which oversees
$472 billion of assets.
Sterling dropped more than 1.3% to $1.6105, marking its lowest
level since November last year, while the euro gained 0.8% against
the pound to GBP0.8037. Citigroup said in a note that sterling
could now easily slump to $1.56 in the event of a 'yes' vote--a
move chiefly triggered by a lack of clarity on what currency a new
independent Scotland would use.
In equity markets, companies with large exposure to the Scottish
economy were hit hardest, with investors deterred by the
uncertainty surrounding the implications of Scottish independence
on regulation, tax and therefore revenue streams.
Royal Bank of Scotland Group PLC shares fell 2.9%, making the
lender one of the biggest losers on London's FTSE 100 index,
followed closely by Scottish-domiciled names such as Standard Life
PLC and SSE PLC.
BNP Paribas credit strategists Gildas Surry and Geoffroy de
Pellegars wrote in a note that a vote for independence could
"significantly impact " RBS's credit rating as well as increase
compliance, operational and funding costs.
Shares in RBS have drifted more than 6.5% lower since the start
of September. The FTSE index, meanwhile, was 1% lower by
midafternoon, having last week hit a 14-year intraday high. In the
U.S., the S&P 500 index has opened 0.1% lower.
On Saturday, a YouGov poll showed 47% of those surveyed were now
likely to vote "yes" to independence, while 45% would likely say
"no." The rest of the 1,084 voters polled Sept. 2-5 said they were
undecided or wouldn't vote.
Paul Donovan, an economist at UBS, said that, even if the
pro-unionists took the lead on September 18, the latest figures
raise the risk of what he dubs a "Québécois scenario"--a narrow
rejection of independence that leaves open a risk of a further
vote. "We believe this would have implications for banking, gilts,
direct investment into Scotland--from overseas and the rest of the
United Kingdom--and sterling, " he said.
Alastair Thomas, head of rates and treasury at ECM Asset
Management, meanwhile, stressed that, whatever the outcome, the
impact was likely to be prolonged. In the event of a "yes" vote, he
said, it could take up to 18 months before all the details are
agreed.
"One could even imagine a delay in the start of U.K. rate hikes
due to economic uncertainty, which is why sterling is being sold
this morning," he said.
Already last week, the currency came under severe pressure as
polls showed a narrowing of the two camps. Gilts and equities
underperformed moderately too, while implied volatility rose.
On Monday, currency strategists at Barclays said that
derivatives that protect users from sharp shifts in sterling are
seeing ferocious demand.
"The abruptness of the shift in one survey should be viewed with
caution, but nonetheless reinforces our long-held view that
Scotland's independence referendum is a serious event risk, not a
tail risk," they wrote.
The currency has now fallen more than 5% from its high in July
of $1.7190.
In government bond markets Monday, the moves were more
muted,
The yield on the U.K.'s 10-year gilt contract was at 2.490%,
around 0.02% higher on the day and broadly in line with a move in
German government bonds. Yields rise as bond prices fall.
Nick Gartside, chief investment officer for fixed income at J.P.
Morgan Asset Management, which manages $1.65 trillion of assets,
said that this was chiefly because the debate isn't materially
impacting the U.K.'s perceived ability to service its debt.
"In the U.K., that is exceedingly high and will be no different
following any vote or poll," he said.
Back in equities, there are also some investors who are
suggesting a silver lining for markets.
"In general, the U.K. consumer sector was hit quite hard by
sterling strength," said Colin McLean, managing director and
founder of Edinburgh-based fund manager SVM Asset Management. "I
think generally a weaker pound could support, especially some of
the retailers, as well as other consumer sector names," he
added.
"Nobody likes uncertainty and we aren't belittling its
ramifications, but there are definitely possible positives," said
Philip Lawlor, partner at London-based asset manager Smith &
Williamson Investment Management LLP, with approximately GBP15
billion under management.
Write to Josie Cox at josie.cox@wsj.com and Tommy Stubbington at
tommy.stubbington@wsj.com