14 Jul 2014
Economists ask: should an independent Scotland have its own stock exchange?
The debate about an independent Scotland’s economic future is today fuelled by stock market researchers who have created a standalone index of Scottish securities – the Scotsie 100.
Identifying 100 purely Scottish stocks currently listed in London, Paul Marsh of London Business School and Scott Evans of Walbrook Economics compare the Scotsie 100 with a parallel ‘Rest of the UK’ index over the last 60 years. They found that £1 invested in the Scotsie 100 in 1955 would have grown to £648 today (with dividends reinvested), a 5.7% increase in real (inflation-adjusted) terms. However, £1 invested in the rest of the UK would have grown to £1,168, a 6.8% increase.
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The research was driven by the question: what if an independent Scotland follows other newly-independent countries and sets up its own stock exchange?
“We have examined the implications of a ‘yes’ vote for Scottish companies and investors, including issues of currency, taxation, EU membership, and regulation,” Marsh explains. “The fact that the terms of any separation from the UK have not been pre-negotiated is generating considerable uncertainty.”
“Today, there are exactly 100 Scottish securities quoted on the London Stock Exchange (LSE). The largest are SSE, Standard Life, Royal Bank of Scotland (RBS), Weir Group and Aggreko.”
“We believe that investors in Scotsie 100 stocks should not be unduly concerned, nor should they be making contingency plans to rebalance their portfolios,” says Evans.
“To some extent, they are protected by the fact that both companies and individuals can re-domicile if necessary. There would also be a period of at least eighteen months during which the terms of separation are negotiated. They can afford to wait and see.”
The key findings in The Scotsie 100: Sixty years of Scottish stocks are:
- There are 100 Scottish stocks today (issued by 97 companies), compared with 200 in the mid-1960s.
- Over the last 60 years, Scottish stocks moved closely in line with those from the rest of the UK until the financial crisis.
- During the financial crisis, the Scotsie 100 underperformed due to the near-collapse of RBS and HBOS.
- £1 invested in the Scotsie 100 at the start of 1955 would, with dividends reinvested, have grown to £648 today, an annualised return of 11.5%, or 5.7% in real (inflation-adjusted) terms.
- The rest of the UK did even better, with a £1 investment growing to £1,168, equivalent to an annualised return of 12.6%, or 6.8% in real terms.
- When financial stocks (or even just RBS and HBOS) are excluded from the Scotsie 100 index, Scottish stocks outperformed the rest of the UK over the last 60 years by a small margin.
- Investment trusts were not only invented in Scotland, but are an important component of the Scotsie 100. While it is sometimes argued that “distance from the noise of London” gives Scottish trusts an edge, the paper finds no support for this, with Scottish trusts slightly underperforming.
Comparing Scotland to other countries with similarly dominant banking sectors, such as Iceland, Cyprus, Greece and Ireland, suggested there were benefits to being part of the UK when the financial crisis hit.
“The near-collapse and subsequent rescue of RBS and HBOS imposed heavy costs on taxpayers,” argue the authors. “The burden was spread across the UK rather than falling entirely on Scotland. The citizens of those other countries enjoyed no such co-insurance, and suffered accordingly.”