We are officially in uncharted waters. The biggest macro risk right now for the markets is not the Fed or European Central Bank…or ISIS or even Vladimir Putin. No, the biggest macro risk is the mood of Scottish voters.
Scotland’s referendum on independence from the UK will be held on September 18. Up until very recently, the polls of prospective voters consistently predicting that the “no” camp—i.e. Scots that prefer to remain in the UK—would win by a fairly substantial margin. But a poll released on September 7 showed the “yes” camp in the lead for the first time.
The latest compilation poll by ScotCen shows the “no” camp still in the lead, but with a week to go, it is far too close to call.
Scotland is a soggy, wind-swept country of less than six million people on an island an ocean away. Why would Scottish independence matter to the capital markets…or to our portfolios?
Because it brings uncertainty. No one really knows how the capital markets will react to the disintegration of one of the oldest and most sophisticated financial powers in world history…or how it might spread.
The closer Scotland comes to independence from the UK, the more Catalonia will agitate for independence from Spain…which brings back all of the uncertainties of the past four years of on-again, off-again sovereign debt crisis.
Is There A Trade Here?
There might be. If a Scottish secession vote spills over into a sharp selloff in the Spanish capital markets, I would suggest using it as a buying opportunity. Put the iShares MSCI Spain (ARCA:EWP) on your watch list. I don’t necessarily expect a swoon, but I want to keep a little powder dry…just in case.
Alternatively, if you prefer to buy individual securities, I like Spain’s banking juggernauts Santander (NYSE:SAN) and BBVA (NYSE:BBVA). Both have a global footprint and are in position to take advantage of the ECB’s coming flood of monetary stimulus.
Again, I don’t necessarily expect to see a major correction. But if Scottish jitters send Spanish equity prices down a quick 10%, I recommend snapping up a few shares. Plan to hold for 6-12 months and use a relatively tight 10%-15% stop loss.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.