Pound Sterling Tumbles on Surge in Scotland Independence “Yes” Vote

09/10/2014 9:25 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

The recent massive gain in the polls for a “Yes” vote for Scotland to be an independent country has caused the pound sterling to continue to take a beating, so MoneyShow’s Jim Jubak offers four stocks to play the weaker currency.

The pound sterling continues to get punished on fears that the “Yes” vote could actually win in the September 18 referendum on Scottish independence. The question on the ballot is simple: Yes/No should Scotland be an independent country? Shockingly to United Kingdom Prime Minister and Conservative Party leader David Cameron, recent polls show “Yes” in a slight lead (2 percentage points) or trailing by just a point or two.

The last month has seen a massive gain in the polls for “Yes.” In the most recent TNS poll, for example, 38% said they’d vote “Yes,” up from 32% a month ago. The “No” vote in the poll fell to 39% from 45%. The poll did show 23% undecided so the referendum could still swing either way, but the move from a lead of 13 percentage points to just a single point has left financial markets with deep uncertainty about the future of the pound, the euro, and the Bank of England.

The pound has dropped to its lowest level in nine months as the financial markets look at the possibility of an independent Scotland that still uses the pound as its currency and the Bank of England as its central bank.

Not that the euro needs any help in pushing the currency lower, but Scottish independence would open up a can of worms for the single currency union as well. Would an independent Scotland apply for membership in the euro—as part of the United Kingdom—now Scotland uses the pound and not the euro. An independent Scotland would also encourage independence efforts in places such as Spain’s Catalonia. What would that mean for the EuroZone?

But the increasing strength of the “Yes” vote has generated new worries that are weighing on the pound. The sinking poll numbers for the “No” position—so heavily supported by the Cameron government—have just drawn new attention to the unpopularity and weakness of the Conservative government. And that unpopularity has led the more farsighted/pessimistic of money managers to wonder if that unpopularity would force the Bank of England to put off interest rate increases anticipated for 2015 for at least a year. Certainly, the Conservatives don’t have any interest at all in adding higher interest rates (and the likely slowing of economic growth that would entail) to their current political problems.

Putting off the rise in interest rates would increase the chances that inflation will run hotter than the Bank of England’s target of 2% (or so Cameron has argued) and it would lead traders who have bought the pound—in anticipation that higher interest rates would strengthen the currency—to unwind those bets. The resulting selling would send the pound lower.

I think it’s still too early to buy UK and euro stocks in anticipation of a bottom in those two currencies. The two have further to fall against the dollar—especially if the Federal Reserve, rather than the Bank of England, becomes the first major central bank to start raising interest rates.

One way to play a weaker pound and euro is to look for shares of UK and EuroZone exporters, since US-based investors would get the benefit of buying assets with a stronger dollar—and seeing the pound- and euro-denominated sales of exporters climb—as a lower pound and euro made exports cheaper for customers in strong currencies (like the US dollar). Exporting companies would get an extra boost when strong currency sales get translated into weaker currencies on domestic financial statements. And, of course, eventually, the pound and the euro would recover, resulting in the appreciation of assets priced in those currencies.

Unfortunately, it’s hard to find pound- and euro-based exporting companies with big US sales and with stocks listed in New York. One that I own in my Jubak’s Picks portfolio is technology company Arm Holdings (ARMH). The stock has struggled recently and is up only 8.8% in the last 12 months.    Another exporter that I’d look at (in about eight months, or so, when some of the company’s recent problems at its United Brands business in India are, I’d hope, behind it), is liquor (and scotch) giant Diageo (DEO).

In the EuroZone, I’d look at exporters that include Finland’s Kone ((KNYJF) in New York) and KoneCranes ((KNCRY) in New York), and escalator competitor Schindler Holding ((SHLRF) in New York).

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. (Please don’t read a market call into that cash position. It’s simply taking time to wind down the management company behind the fund.) I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.

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