Monday, September 15, 2014

How to protect your portfolio against a Scottish exit

By Sara Sjolin

NEW YORK (MarketWatch) — With less than a week to the Scottish independence referendum, investors have started to assess the risks of a breakup of the United Kingdom. The pound has already been flirting with a 10-month low, the FTSE logged its first weekly slide in five weeks on Friday and according to analysts at Société Générale more weakness in U.K. assets could be on the cards.

In a note on Monday, they laid out three ways to best protect your portfolio against a “yes” vote for Scottish independence at the referendum on Thursday.

1. Stay away from U.K. equities: There is a major risk that a breakup of the 300-year union would trigger a substantial political crisis, which is expected to greatly hamper stocks in the U.K., the Société Générale analysts said. One of the concerns is that a Scottish exit would reduce the number of pro-European members in the parliament, raising fears that the U.K. could vote to leave the European Union.

Another key fear, is whether Prime Minister David Cameron will be forced to resign and call a snap election. Such a move could bruise growth and economic confidence in the U.K., which had finally started to rise in 2014.

2. Stay away from Scotland-related assets: It already looks like investors holding Scotland-exposed equities have been hurt in the run-up to the vote: SocGen’s Scotland-related basket of 20 European stocks has underperformed the FTSE 100 UKX, -0.04% by 8% year-to-date and a “yes” vote would trigger another bout of underperformance. A lot of unanswered questions would hover over the companies, such as which currency will Scotland get and under which tax regime would the firms pay taxes.

Among major companies in the Scotland-exposed basket are BAE Systems BA., -0.20%  , Lloyds Banking Group LLOY, -1.39% LYG, -1.53% Royal Bank of Scotland Group RBS, -0.86% RBS, -1.61% Diaego DGE, +2.23% DEO, +2.01% Pernod Ricard RI, +0.50% J Sainsbury SBRY, -1.01% Tesco TSCO, -0.07% Technip TEC, -0.97%  and Next NXT, +0.36%

3. Buy pound-sensitive stocks: Some companies are poised, however, to benefit from an independent Scotland, mainly because an exit is expected to accelerate the recent slide in the pound GBPUSD, -0.29% SocGen pointed out 13 U.K. stocks that are sensitive to the sterling exchange rate, with this pound-exposed basket since January 2013 showing a 90% correlation with currency movements. In short, when the pound falls, the basket outperforms the FTSE 100.

Among the companies that could perform well after a Scottish “yes” vote are Barclays BARC, -0.26% BCS, +0.10% HSBC HSBA, +0.12% HSBC, +0.00% Standard Chartered STAN, -0.60% SABMiller SAB, +9.82% SBMRY, +9.02%  Unilever ULVR, -0.15% UL, +0.02% Burberry BRBY, +0.13% BURBY, +0.30% WPP WPP, -0.94% ARM Holdings ARM, -1.73% ARMH, -1.73%  and British American Tobacco BATS, +0.11% BTI, +0.14%

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