UK has shot itself in the foot however Scotland votes, says Woodford

Neil Woodford, one of the UK's best known and best performing fund managers, thinks the UK is set for a period of 'extraordinary economic and political uncertainty', whatever the outcome of yesterday's independence referendum in Scotland.

'The UK has already crossed a constitutional Rubicon regardless of which way the vote goes', Woodford writes. A 'Yes' vote would obviously bring a prolonged period of instability while the terms of separation were thrashed out, but Woodford argues that even with a 'No' vote, the UK would experience increasing fragmentation of governance – 'effectively the federalisation of the UK'.

'Devo Max'

In the event of a 'No' vote (as the bookies currently suggest is likely), Scotland has been promised even greater devolution, which Woodford suggests may be a much better outcome for the Scottish Nationalists. 'Devo Max', as it has come to be known, would deliver 'all the powers and control over spending, taxation and social policies that the SNP originally wanted, but it removes the headaches around currency and the Scots retain the air cover provided by the Bank of England and its deposit guarantee scheme.

With all these gifts being showered on Scotland, the Welsh are sure to want greater autonomy for themselves, as perhaps will the Northern Irish. And then what about the English? Will they continue to be happy for their affairs to be managed by a parliament containing MPs from Wales and Scotland?

This will create a 'new dynamic of complexity and uncertainty which is already reflected in a weaker pound … [and which] … will have a dampening effect on consumer sentiment, business confidence and investment intentions'.

Woodford, who rose to prominence as manager of the Invesco Perpetual High Income Fund in the 1990s and now runs his own fund management company, believes the UK economy is already losing momentum and that 'these latest political developments can only accelerate and prolong this slowdown'.

Perception of instability

The pound has already fallen 5% against the US dollar in the past two months (although this partly reflects a resurgence of the greenback). But with some Scottish Nationalists suggesting that Scotland could simply walk away from its share of the UK national debt, you can see why investors might be nervous. Even if Scotland votes to stay in the union, that perception of instability will remain in the minds of investors, increasing the UK's borrowing costs.

Most investors hate uncertainty (although it does tend to throw up the best opportunities) and politicians and central bankers go to extraordinary lengths to try to provide stability (or restore it) – witness all the bailouts and cheap money provided during and since the global financial crisis. So the self-inflicted injuries caused by Scotland's independence vote go against the grain.

Of course, with the Scots feeling so strongly about independence then it's right that they should have their vote – but, as Woodford suggests, it would be a mistake to think that the instability will disappear even with a 'No' vote.

Disclosure: By ethnic extraction, the author, James Carlisle, is mostly English, with a little bit of Welsh, a tiny bit of Scottish and a light dusting of Irish. When he plays soccer he feels Italian.