Scotland, secession, and setbacks

On Sept. 18, 2014, voters will decide if Scotland will remain a part of the United Kingdom. It will determine the fate of a political union that has lasted more than three centuries.

In large part, the independence vote is driven by Scotland’s disdain of the fiscal burden that has existed within the U.K. since the global debt crisis. (It’s important to keep in mind that the global debt crisis is a significant precursor to what is happening in Scotland today.) Those in favor of secession believe Scotland has assumed more than its fair share of the fiscal burden. A look at some economic data helps explain their dissatisfaction:

  • For 2013, Scotland’s gross domestic product (GDP) accounted for 9.7% of the U.K’s total, while its tax revenue accounted for 9.9% of the union’s total.
  • Scotland’s deficit as a percentage of GDP is 6.4%, versus 5.8% for the U.K. as a whole.
  • When including offshore activity in the North Sea, Scotland’s per-capita GDP ranks 14th within Organization for Economic Cooperation and Development (OECD) countries, ahead of the U.K. (which ranks 18th).

Data: Bloomberg; Scotland government

The bigger picture: a chain of possible challenges

If the referendum passes, we believe it could take a long time to rectify some potentially messy economic issues. There is a lot at stake, and because of this, many market analysts believe the referendum will not pass.

Even if the referendum fails, a strong showing of pro-independence votes could have negative ripple effects around the world. There could, for instance, be a resurgence of independence movements within other parts of Europe, much as we’ve seen within the Catalan territory in Spain. Or consider Germany; while it is not a perfect apples-to-apples comparison with Scotland, we can post this hypothetical question: Will it want to continue sharing the burden of unionhood, or will its relative strength prompt it to become antagonistic?

All of which leads us to point out that separatists around the world could create volatile environments for citizens and officials (and investors) to contend with. It is a component of international investing that we are keeping a careful watch on.

The views expressed represent the Manager's assessment of the market environment as of September 2014, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

9/17 (13217)

9/17 (13217)

Notes from the desk