Market Commentary - 9.19.2014

We Suspect Even Sir William Wallace Would Have Voted “No”

Late in the 13th century, Scottish landowner, Sir William Wallace, was one of the main leaders during the Wars of Scottish Independence against King Edward I of England. In these wars, England attempted to establish its authority over Scotland while the Scots fought to keep English rule and authority out of Scotland. Hollywood and Mel Gibson memorialized his story through the 1995 “Braveheart” movie. Over 700 years after the Wars of Scottish Independence, through a peaceful process, Scottish voters rejected a heated bid for independence. Though Sir Wallace fought against the English and died in an attempt to gain independence, if alive today, we suspect he would have been pleased with the vote.

When the vote for Scottish independence was finalized, the tally showed 55% of voters rejecting independence and 45% favoring it, a convincing win that defied advanced polls suggesting the referendum was too close to call. If, on the other hand, the votes were reversed and Scotland had moved towards independence, the potential negative ramifications would have been significant. Of primary concern to England, the World, the financial markets, and Sir Wallace would have been the following:

  • Currency — What would be the common currency in Scotland? Would Scotland stick with the Pound and would the Bank of England allow Scotland to use it without significant budget controls? A conversion to the Euro would be deemed years away.
  • Oil — The United Kingdom is the largest oil producer in the EU. Most of the oil rich fields lie in Scotland. The discussion regarding splitting oil revenues would be tantamount to a married couple discussing assets in a messy divorce.
  • Nuclear Submarines — Scotland, who wants a nuclear-free country, eventually would force four British, but Scottish-based, nuclear submarines, to leave. It would be unsure where these submarines would have to go. NATO defenses could be weakened.
  • Scottish Debt — If a split took place, it would have been likely that the British government would announce that it would honor all its debts, including Scotland’s share, in a move to reassure financial markets. However, it is estimated that an independent Scotland would owe Britain an amount equal to roughly 10% of the total United Kingdom public debt. Credit ratings agency Standard & Poor’s voiced skepticism about this scenario and how Scotland would repay the debt.
  • Member of the EU? — If Scotland exited the United Kingdom, it could attempt to join the EU. However, that process could take years and all current members would have to approve the application. One would suspect that some EU countries may be reluctant to approve for fear of encouraging other separatist movements, such as in Spain.

700 years ago, Sir William Wallace waged a war against England for the right of Scottish independence. Not suggesting that his efforts were wasted, but this week Scottish voters took the peaceful route of voting for or against independence. While the final tally would have been counter to his efforts centuries ago, given the aforementioned concerns about Scottish independence, a living Sir Wallace most likely would have punched the “no” in his voting card.

Looking forward, Europe has dodged this bullet. Geo-political concerns in Eastern Europe and some signs of weaker growth are next to keep an eye on. However, monetary authorities remained firmly entrenched on the side of financial markets by trying to stimulate European economies. Yes, there will be headwinds and tailwinds as we move forward. As such, we remain committed to a diversified portfolio that is overweight in U.S. equities, but is opportunistically increasing exposure to developed Europe. Outside of equities, we remain committed to including commodities, real estate and other alternatives investments as potential ways to mitigate portfolio volatility.

This information is compiled by Cetera Investment Management.

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