Idea of the day: Trading the Tory surge in Scotland

What: It is easy to forget, amongst all of the drama of May forming a coalition government this afternoon, that one of the biggest takeaways from the UK election was the abating risk of a second Scottish referendum, after the Conservative Party performed extremely well north of the boarder, having its best showing since 1983.

What: It is easy to forget, amongst all of the drama of May forming a coalition government this afternoon, that one of the biggest takeaways from the UK election was the abating risk of a second Scottish referendum, after the Conservative Party performed extremely well north of the boarder, having its best showing since 1983.

We believe that this could have a medium-term positive effect for Scottish companies in the FTSE 100, including Weir, the oil and gas engineering company, Scottish mortgage Investment Trust, and Aberdeen Asset Management. The prospect of a Scottish independence under the SNP has now been removed, which should reduce the risk premium on these stocks, and we may see their share prices rise in the medium-term.

How: The chart below shows the FTSE 100 (green), Weir (orange), Scottish Mortgage (yellow) and Aberdeen (white). This chart has been normalised to show how these stocks move together. As you can see, Aberdeen Asset Management has lagged the FTSE 100 since November last year, partly because of its planned merger with Standard Life. However, now that the prospect of Scottish independence is virtually off the table, this stock may play catch up to its regional peers.

Scottish mortgage, a newcomer to the FTSE 100, has outperformed the FTSE 100 index, and its stock has been trading strongly for most of this year. It is the top Scottish-based performer in the FTSE 100, and it made a record high today as the Scottish Tories stole the show from the SNP. This stock has some serious momentum behind it, and the reduction in political uncertainty in Scotland could make it more attractive in the coming weeks, even at these lofty levels.

Weir has also outperformed the FTSE 100 since October 2016, however, it has started to stall since end of April, and the stock has been under pressure from a fluctuating oil price. It rallied after today’s election result, and is currently testing a cluster of moving average resistance. A reduced political risk premium could boost this stock and help it to recover back towards the late April highs above 2000, however, Weir is likely to remain vulnerable to commodity price movements, and is thus a riskier proposition compared to Scottish Mortgage.

Overall, trading the reduced risk of a Scottish referendum could become a theme for these quieter summer months.

Figure 1: 


Source: City Index and Bloomberg 

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