Will Talks of Scottish Independence Vote Hurt British ETFs?

‘Exit’ has become a key word in the European political scenario. In June 2016, Britain decided on leaving the European Union by a referendum and got a new prime minister Theresa May (read: UK Votes for Brexit: ETFs Winners & Losers).

This year, the Euro zone is scheduled to see several elections in the Netherlands, Germany, France and possibly in Italy. Talks are also rife that a Nexit (Netheralnds out of Euro zone) or Frexit (France leaving Euro zone) are in the cards. If this was not enough, Scotland also intends to exit Britain.

Scotland’s independence referendum took place in September 2014 wherein the majority went against the agenda of the country’s independence. About 55.3% of voters among the 84.6% turnout wanted Scotland within the boundary of the U.K.

However, Scotland’s first minister Nicola Sturgeon indicated recently that she plans to begin the legal process for a new referendum on Scottish independence to be held by the spring of 2019, as per Bloomberg.

The decision came in the wake of U.K.’s preparation to be free from the European Union. Scotland’s semi-autonomous government opposed Brexit as the nation is in favor of staying in the EU. As many as 62% Scottish voters had opposed a British exit in last year’s referendum. In short, Scotland wants to have access to the EU’s single market or whole membership (read: 3 Reasons to Buy Eurozone ETFs Now).

Nicola Sturgeon also made it clear why spring 2019 has been chosen as the ultimate time for the second independence referendum. By that time, the terms of Brexit would likely be public and thus Scottish voters will be able to make an informed choice.

Nicola Sturgeon will “seek the approval of the Scottish Parliament to open discussions with the UK Government on the details of a Section 30 order - the procedure that will enable the Scottish Parliament to legislate for an independence referendum.” British prime minister Theresa May is however readying to reject the demand for Scottish Independence.

What Do Polls Say?

Though polls often do not come correct, we still take a look at it when a situation like this comes up. ‘A survey published last week showed Scots were ‘evenly split’, while one newspaper hinted that 52% are in favor of remaining in the U.K. and 48% want an exit, as per Bloomberg.

Impact on Pound

British pound dived as soon as Nicola Sturgeon called for a second independence referendum but managed to stay calm after the timetable for the referendum was disclosed which is too late to leave an immediate impact on pound. CurrencyShares British Pound Sterling ETF FXB was up about 0.5% on March 13 (read: How Hard will Brexit be on UK and Pound ETFs).

Impact on British Economy

Investors should note that if Scotland breaks free from the U.K., Brexit will be less helpful for British. For example, as per the source, England’s manufacturers are not being able to capitalize on a lower pound as expected previously. It would help them enter EU’s single market.

If Scotland cut ties with the U.K., those manufacturers may migrate to an independent Scotland and can do business with the Euro zone freely. And if that happens, the economy of England will likely be hurt to quite an extent.

Investors should also note that “Edinburgh is the U.K.’s second largest financial center after London and home to a cluster of asset management companies.” So, the banking industry of England may be under pressure. This would putiShares MSCI Europe Financials EUFN in high focus (read: ETF Winners and Losers on ECB's Hawkish Tone).

If this is not enough, about 90% of U.K. oil – which is the largest in the EU – is generated from Scotland. Though oil prices plunged in the last two years, the British economy will lose a major source of an important commodity if Scots decide to walk out.

Moreover, the odds are high for Northern Ireland joining Ireland. So, Britain’s falling to pieces will not bode well for the economy and may spoil the whole purpose of Brexit.

Bottom Line

We do not expect any decision to be taken any time soon. Also, as per reports, if at all an independent Scotland is formed, the country may have to pay Britain as much as £150 billion. With oil running low and the economy faltering, Scotland may not afford to pay such a high debt and thus choose to remain in the British territory.

As of now, we see less threats for British funds like iShares MSCI United Kingdom EWU. The fund gained over 1% on March 13. The currency-hedged British fund iShares Currency Hedged MSCI UK HEWU also added about 0.7% on March 13, the day talks of the second referendum were triggered.

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CRYSHS-BRI PD S (FXB): ETF Research Reports
 
ISHARS-MS EU FN (EUFN): ETF Research Reports
 
ISHARS-CHM UK (HEWU): ETF Research Reports
 
ISHARS-UTD KING (EWU): ETF Research Reports
 
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