UK Suffers Biggest Capital Outflow Since Lehman As Scottish Vote Nears

Investors pulled $27 billion out of UK financial assets last month - the biggest capital outflow since the Lehman crisis in 2008 - as concern mounted about the economic and financial consequences if Scotland left the UK, according to Reuters. Furthermore, Morgan Stanley said daily equity flow data pointed to "some of the largest UK equity selling on record."


As Reuters notes,

Data compiled by London-based consultancy CrossBorder Capital said financial outflows from the UK totaled $27 billion in August, compared with inflows of $8.9 billion the same month last year.


That's the biggest monthly outflow since the white heat of the financial crisis in 2008, when giant U.S. bank Lehman Brothers went bust. It exceeded the selling of UK assets seen around the 2010 general election, when an inconclusive result led to several days of uncertainty.


"Sterling outflows have been an issue since the end of June, but they really gathered pace in August and now look like intensifying again with the possibility of Scottish independence coming to the front of investors' minds,", said Michael Howell, the managing director of CrossBorder Capital, which compiles the index.


The UK outflow was more than double the combined outflow from Germany and Australia. France, the United States, Canada and Japan all attracted net inflows.


Also on Friday, Morgan Stanley said daily equity flow data pointed to "some of the largest UK equity selling on record, demonstrating investor concerns ahead of the Scottish referendum next week."


Concern over the financial, economic and political effects if the UK breaks up has also weighed on sterling, triggering a surge in exchange rate volatility to its highest since the 2010 general election. In addition, selling pressure has mounted as speculation grew that the Bank of England would soon raise interest rates.




"The sterling index has effectively collapsed and the UK is second only to Japan in terms of financial market outflows," Howell said.


So far this year, there has been a net $206 billion outflow from the UK. Last year, there was a net annual inflow of $63 billion, Howell said.

While some respite in GBP-selling has occurred in thge last few days as boisy polls show a slight bias to a "no" vote, as we warned previously - With a “no” vote, the UK would still face rising political uncertainties.

The UK political landscape is in a state of extreme flux, with the enduring Scottish independence movement, the rise of UKIP as a political force and resultant change in UK party political dynamics, the moderate-to-high probability of a change of government in the 2015 elections and uncertainties over post-election fiscal policy, plus the non-negligible risk of a referendum on UK exit from the EU in 2017-18 or so. Even if the “no” camp prevails in September, we do not foresee a return to the pre-referendum political status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum, and we suspect these UK political risks are underpriced in markets.