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"Yes" Or "No" Vote: The Possible Effects Of The Scottish Referendum On Equities

The Scottish independence referendum looms large for investors this week.  The latest polls suggest the outcome is too close to call, with 47% indicating they will vote “No” and 46% “Yes” (Source: Panelbase as of 12 September 2014).  Many believe that the vote will have an immediate impact on the pound with a “Yes” vote causing further depreciation and a “No” vote leading to a bounce back in rates.  It is important to consider the possible fallout of either scenario.

Source: S&P Capital IQ, as of 15 September 2014. Past performance is not indicative of future returns.

With this in mind, we looked at the performance of our 8 style indicators across exchange rate regimes in the UK.  This allows us to consider at how different strategies perform across market environments.  The chart below shows the cumulative return spread of going long the top 20% and short the bottom 20% for each style. 

We looked at style performance in the S&P BMI United Kingdom Index since 1995 in depreciating (“Yes” vote) and appreciating (”No” Vote) GBP Regimes.  Styles that focus on earnings and management quality (Capital Efficiency and Earnings Quality Indicators) have the largest difference between the two regimes.  In Depreciating (“Yes” vote) regimes, investors move into well managed companies that deliver consistent earnings and return on capital.  Interestingly, momentum and sentiment styles have worked well across both regimes (Price Momentum and Analyst Expectations).

Source: S&P Capital IQ Alpha Factor Library 15 September 2014

Regime defined as GBP Appreciating/Depreciating in months where USD/GBP is greater than/less than or equal to trailing 3 month average. For illustrative purposes only. Backtested returns do not represent the results of actual trading and were constructed with the benefit of hindsight.  Returns do not include payment of any sales charges or fees. Inclusion of fees and expenses would lower performance.  Past performance is not a guarantee of future results.

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