(Repeats story unchanged)
* UK break-up seen as outside chance
* Many experts do not expect much volatility
* Insurance choices prove tricky, costly
By John Geddie and Jemima Kelly
LONDON, July 27 Less than two months before an
independence vote that could ultimately tear apart a G7 country,
investors in financial markets seem largely unmoved.
Last week saw the first glimmer of action in currency
markets to protect against the possibility of Scotland voting on
Sept. 18 to break away from the United Kingdom.
But against the backdrop of ultra-low volatility in
financial markets that barely stirs even in major geopolitical
crises, such moves have been small.
Reasons for leaving financial positions uncovered heading
into the vote range from the complexity, the costs and
expectations of interest rate rises which muddy the waters.
Generally, it's just not considered worth it.
"Investors are completely not positioning themselves for the
potential of a vote in favour of independence," said Insight
Investment's head of currency Paul Lambert.
Opinion polls that show a lead of around 20 points for the
'No' voters, excluding the undecided, are enough to convince
many investors that anything else is too remote a possibility to
Bookmakers see a 'No' vote as highly likely, offering odds
of just 1/8. One Surrey-based businessman staked 400,000 pounds
($680,000) on this bet - the biggest political gamble that
bookmaker William Hill has ever received - last month when the
odds were 1/4, standing to win 100,000 pounds if he is right.
But even for those slightly perturbed by some polls that
show nearly 30 percent of voters are still undecided, finding
how best to protect financial assets is no simple task.
"It's very difficult to factor in the risk of Scottish
independence. At the moment Scottish assets are so embedded in
UK assets, so how do you pick them off? What would you sell?"
said Rabobank currency strategist, Jane Foley.
Morgan Stanley's strategy team has been rare among banks to
put a figure on the chances of a 'Yes' vote - 25 percent. It,
among others, is certain that sterling and UK government bonds
would come under some pressure if Scottish leader Alex Salmond's
nationalists won the vote.
It says the volatility it would cause could discourage the
Bank of England from raising interest rates in support of a
rebounding UK economy - an eventuality that money markets have
fully priced in for December.
Investors can decide to take out an option to insure against
this outcome while retaining their existing positions.
The question is whether the price of protection is worth
paying to cover the potential losses which, in the currency
markets, some have predicted could shave up to 10 percent of the
pound's value versus the dollar.
Many are unconvinced.
One money markets broker, who wished to remain anonymous,
said "the ramifications of a 'Yes' vote could kneejerk sterling
money markets higher, but not enough in my view to pay for the
"My conclusion is that the Scottish independence vote is
Citi is one of the few banks to have stuck its neck out and
advised clients to try to offset any potential losses by buying
credit default swaps on UK government bonds.
With the costs of five-year CDS contracts at their cheapest
level since 2008 - less than higher-rated German equivalents -
there is potential for their value to rise amid
However, very few people are bothering to buy them.
The net notional for five-year UK CDS - a broad measure of
the market's exposure to this contract - fell to its lowest
since 2008 this month, according to Creditviews data.
The underlying message from strategists and researchers to
equity investors is "don't worry".
Morgan Stanley predicts there will be no repeat of the
jitters that gripped Canadian stocks when one of its most
productive provinces, Quebec, nearly seceded in the mid 1990s.
"A large and sustained move is unlikely given the small
impact we expect on UK profits from a Scottish exit," it said.
Investors holding any of the 100 Scottish-based companies
listed on UK bourses can also sleep easy, concluded a paper by
Paul Marsh of the London Business School and Scott Evans of
"To some extent, they are protected by the fact that both
companies and individuals can redomicile if necessary," said the
paper. "There will also be a period of at least 18 months during
which the terms of separation are negotiated. They can thus
afford to 'wait and see' and then make plans."
There has so far been no evidence that equity investors are
bracing for a shock. There are those, though, who fear this
ambivalence, which they say also surrounds UK plans to hold a
referendum on membership of the EU, could come back to bite.
"The most mismanaged country risk I have ever seen in my
career is the UK," said Beltran Lastra, a senior equities fund
manager at JPMorgan Asset Management. "The Scotland case is
another example of that happening."
($1 = 0.5892 British Pounds)
(Writing by John Geddie; additional reporting by EMEA markets
team; editing by Philippa Fletcher)