Don’t Bet Your Sporran on a Scottish Stock Market

But would the companies follow?
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As Scotland builds up to its mid-September vote on whether it should become independent, plenty of attention has focused on how its economy might fare outside of the United Kingdom. The latest comes in the form of an analysis of what a Scottish stock market would look like, produced by a pair of economists from the London Business School and Walbrook Economics, a consultancy.

Their observations: a Scottish stock market wouldn’t look particularly out of place among the plethora of smaller national equities exchanges that have sprung up since the collapse of Communism. But it would face some serious challenges to get off the ground.

Authors of the report, “The Scotsie 100: Sixty years of Scottish stocks,” the LBS’s Paul Marsh and Walbrook’s Scott Evans, reasonably, assumed that an independent Scotland would want its own market for trading equities rather than continue to rely on the London Stock Exchange . As, indeed, it did until 1973 when the Glasgow stock exchange merged with London’s.

But wanting an exchange for nationalistic reasons doesn’t necessarily square with the economics of it. To produce their analysis, the researchers looked at how an independent Scottish market for Scottish companies might have fared over the past 60 years.

They figured a Scottish firm was one with a Scottish headquarters. The definition was relaxed slightly for investment companies, in which Scotland has a particularly heavy concentration, to those either registered in Scotland or known to be managed from there.

A hundred listed companies fit the bill–of more than 2000 U.K. listed firms. Indeed, this represents one hurdle to a prospective Scottish exchange. Not only aren’t there many listed Scottish companies, but the number has been declining. In 1955 more than 200 firms would have matched the researchers’ nationality criteria. And as the numbers of firms has shrunk their relative market capitalization has declined faster–apart from during a pre-crisis bubble in banking stocks. In 1955, Scottish shares made up around 8% of the U.K. market by both number and value. Now those figures are little more than 5% and 3.3% respectively.

But it’s not an impassable barrier. Even with just a hundred listed stocks, a Scottish market would slot into a respectable 28th place on the global stock exchange rankings by free market float. The total market capitalization of £53 billion ($91 billion) would be only £9 billion less than Norway’s.

What’s more, Scottish shares have held their own in terms of generating returns for shareholders–at least until the financial crisis. Between 1955 and 2007, they closely tracked those from the rest of the U.K. But when banks started to hit the buffers with the run on Northern Rock and the Lehman Brothers bankruptcy, Scotland’s heavy weighting in financials told. In mid-2007 the market capitalization of Scottish banks was equivalent to 85% of its GDP, compared with 27% for Greece and 23% for Ireland, two other economies hit hard the banking bust.


The result was drastic underperformance. A pound invested in Scottish shares in 1955 would now be worth £648 compared with £1168 invested in non-Scottish British stocks. All of that shortfall came from the 2007 crisis.

Still, other markets have done considerably worse–look at the Athens exchange for instance–and yet survive.

It’s not size or how well it’s done that represents the biggest barrier to a successful Scottish exchange. It’s inertia and London’s proximity. Why would Scottish firms and their largely international investors want to move their listings from the LSE to a smaller, less liquid market which would undoubtedly have fewer services on tap?

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