Here's What A Hypothetical Scottish Stock Market Would Look Like

What a Scotsie 100 would look like

INDEPENDENT countries tend to have their own stockmarkets; of the last 32 nations to be created in Europe and Asia, all bar Kosovo and Turkmenistan have set one up. All current 28 EU members have their own exchange.

So if Scots vote to leave the United Kingdom on September 18th they can be expected to follow suit.

What would a Scottish stockmarket look like?

Paul Marsh of the London Business School and Scott Evans of Walbrook Economics have compiled a list of companies that are headquartered or registered in Scotland and currently trade on the London Stock Exchange. The result is a list of stocks that might make up a future "Scotsie 100" that would form the core of any Caledonian portfolio (along, of course, with inflation-linked gilts, or "index-linked kilts" as they would doubtless be dubbed).

The result would be a heavily financial market, with banks and insurance companies making up 28% of the index by value and investment trusts a further 26%. The market would also be highly concentrated, with just three large companies (SSE, a power utility, Standard Life, an insurance company and Royal Bank of Scotland) comprising 40%.

This financial focus has weighed on the hypothetical index in recent years. Messrs Marsh and Evans compiled an index of Scottish stocks dating back to 1955; the real return since then has been 5.7% a year against 6.8% for the rest of the UK (see chart). All the underperformance has occurred since 2007 and is mostly a result of the collapsing share prices of Royal Bank of Scotland and HBOS, another bank, during the credit crisis. Excluding financial companies, a Scotsie 100 would have outperformed the rest of the country.

If all Scottish-based stocks transferred their listing to a Glasgow (or Edinburgh) exchange, the Scotsie 100 would rank as the world's 28th largest market, with a value of £73 billion ($125 billion) as of the start of the year. But the authors doubt many companies would move.

FTSE, the body that compiles the London indices, would be obliged to treat Scottish companies as foreign stocks; they might as a result drop out of the FTSE 100, the premier British index. That would make them less appealing to international investors. And Royal Bank of Scotland might be forced to move by EU rules that require a bank to have a headquarters in the country where it is most active; that would be England, not Scotland.

Finally, companies tend to want to be listed on the most liquid available market. Ireland has been independent for nearly a century but some of its largest companies have moved from Dublin to London in recent years; the Irish stock exchange now has just eight companies with a free float (shares available for private investors to buy) of more than EUR1 billion.

Perhaps history is instructive. Until 1964 Scotland had four stock exchanges, in Glasgow, Edinburgh, Aberdeen and Dundee; by 1973 all had been merged into the London exchange. For investors, liquidity tends to trump patriotism.

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