Sterling Bears Prowl Before Scottish Vote

Frankfurt Trust joined GAM Holding AG among companies selling U.K. assets as opinion polls signal growing support for Scottish independence that may undermine the British economy.

After two surveys showed the referendum on splintering the three centuries-old union would be too close to call, Frankfurt Trust recommended selling the “overvalued” pound and GAM is betting against sterling and U.K. bonds on speculation the central bank will delay increasing interest rates. Credit Suisse Group AG said a separatist victory would put Scotland in a “deep recession” that will leave the shares of its companies vulnerable.

“On the back of the Scottish referendum, it’s a good idea to be short the pound,” Christoph Kind, head of asset allocation for money manager Frankfurt Trust, said in a telephone interview today. The Frankfurt-based company manages about $20 billion of assets. “There were already fundamental reasons for it to be viewed as overvalued. Scotland is a tactical issue” that reinforces the weakening bias, he said.

A short position is a bet that a currency will depreciate.

Sterling Slump

Sterling has slumped and volatility has surged since a YouGov Plc poll over the weekend showed for the first time this year a lead among Scottish nationalists. A TNS survey yesterday showed the advantage of pro-U.K. voters shrinking to just a single percentage point from 13 points last month, prompting a rush by the leading parties in the London Parliament to offer Scotland additional powers if it votes to stay in the union.

The latest poll on voter intentions is due later today.

Conservative Prime Minister David Cameron, his Liberal Democrat deputy, Nick Clegg, and Ed Miliband, leader of the opposition Labour Party, canceled planned appearances in Parliament today to visit Scotland in an attempt to bring voters back from the brink and reject independence in the Sept. 18 plebiscite. Scotland’s First Minister Alex Salmond, the Scottish Independence Party chief spearheading the Yes campaign, said his three rivals were panicking.

Scotland’s future currency has been central to the campaign debate and concern a Yes vote will lead to financial instability has roiled markets in the past week.

The Scottish government favors a currency union with the rest of the U.K. and the BOE remaining a lender of last resort. All three major U.K. parties oppose that and BOE Governor Mark Carney said yesterday such a scenario would be incompatible with sovereignty.

Financial Stability

Scottish Finance Secretary John Swinney said in an interview on Bloomberg Television today that the Bank of England will still be responsible for financial stability for at least the 18 months of negotiations that would likely follow a Yes vote.

“We’ve set out a credible and responsible approach to setting up a currency union,” Swinney said. “In the aftermath of a Yes vote, the position of the U.K. government will change dramatically” because the proposed arrangement is “in the interest of both Scotland and the U.K.,” he said.

Sterling, still the biggest gainer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes in the past 12 months, slipped 0.5 percent in the past week. It had already begun paring its advance as investors trimmed expectations the BOE would lead its counterparts in raising interest rates.

Too Strong

Even after dropping more than 6 percent against the dollar from this year’s peak, the pound remains 11 percent too strong, according to data from the Organization for Economic Cooperation and Development. Sterling has tumbled from $1.7192 on July 15, which was the strongest since 2008.

It was at $1.6132 as of 5 p.m. London time, up 0.2 percent from yesterday after touching the lowest since November. The U.K. currency rose 0.4 percent to 80.03 pence per euro after touching 80.66, the weakest since June 11.

“The story has changed completely” from when some investors were betting the BOE would lead its peers in tightening policy, Frankfurt Trust’s Kind said. “It seemed it was a race between the U.S. and the U.K. on who was going to raise rates first.”

The FTSE 100 Index of leading U.K. shares was little changed after falling in the past three days.

Royal Bank of Scotland Group Plc, oil-services company John Wood Group Plc and power provider SSE Plc, which are all based in Scotland, are among 20 companies that Credit Suisse strategists led by Andrew Garthwaite have included in an index of stocks exposed to a possible Yes vote.

The gauge is down 1.8 percent this year, although it is up 1.5 percent since the start of August.

‘Downward Trend’

The Bank of England will probably increase the benchmark rate from a record low in spring next year as wage growth accelerates and the recovery gains momentum, Carney said yesterday. The European Central Bank cut interest rates this month.

The combination of next week’s referendum and a general election in the spring may force the Bank of England to delay policy changes for as long as one year, GAM Holding’s Tim Haywood said yesterday in New York. That would lead to a larger difference between short-term interest rates, which are guided by the BOE benchmark, and longer-term yields, which generally reflect inflation expectations.

Gilts Fall

“The Bank of England may be well and truly behind the curve,” Haywood, a London-based investment director whose company oversees about $140 billion of assets, said.

U.K. 10-year gilts fell for a third day, with the benchmark yield rising three basis points, or 0.03 percentage point, to 2.51 percent.

The possibility of a Yes-vote victory next week has prompted LNG Capital LLP, a London-based hedge fund that focuses on credit markets in western Europe, to short some sterling corporate bonds.

“A Yes vote looks credit negative for the U.K.,” London-based Chief Investment Officer Louis Gargour said yesterday. “The U.K. retail sector has come under pressure as a result of the uncertainty around a Yes vote and the likelihood of a GDP slowdown if Scotland leaves.”

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