The race to be the next Conservative party leader is in full swing and the electorate will find out who their new Prime Minister (the 4th in the past 10 years) is on 5th September.
Liz Trus and Rishi Sunak are very different personalities with contrasting economic policies and, like every new Prime Minister, will bring new ideas and policies. But what effect, if any, will a change in leadership have on the returns of financial markets?
Spotlight on the UK
The graph below shows the returns of the FTSE All Share over the last 20 years, through the leadership of 5 different Prime Ministers from 2 different parties, as well as a coalition Government. These 5 leaders differed in their approach to governing and economic policy. Some were more pro-business than others, with contrasting views on financial regulation. All 5 had to deal with different economic conditions and crises, from the global financial crisis in 2007/08, the UK’s decision to leave the European Union in 2016 and the onset of the Covid-19 pandemic in 2019.
Despite these challenges, the FTSE All Share has delivered a total return of 304.79% over the past 20 years. What markets dislike most is uncertainty, as uncertainty brings volatility and that can lead to either very sharp or elongated periods of smaller compounding declines.
The returns achieved through 20 years of changes show the resilience and robustness of financial markets and their ability to compound returns for investors willing to ride out political storms and economic headwinds.
Over the pond
In the US, the tenure of a President is generally either 4 or 8 years, depending of course on the President’s behaviour (think Nixon, and the Watergate scandal). This tenure provides certainty of government which can be encouraging for financial markets.
Looking back at the past 20 years, the US has had 4 different Presidents - 2 Republicans and 2 Democrats. You could argue that 3 out of 4 were fairly predictable and one slightly more erratic when it came to economic policy (draw your own conclusions on who’s who). Again though, despite differences in economic policy, the cumulative total return over 20 years for the FTSE USA has been very strong at 582.63%.
The US was first to face the fallout from the global financial crisis and was far from immune to the economic impact of Covid-19, but the resilience of their markets is clear in the long-term numbers.
It’s important to remember that these graphs and data points only show a snapshot in time. Data can very quickly move against an incumbent. Take George W. Bush for example. The FTSE USA produced a very healthy return through most of his tenure, but the global financial crisis wiped out any of the gains he might have hoped to attribute to his economic policies, raising the question instead that they could have been part of part of its cause?
On the other hand, Barack Obama took office almost exactly when markets bottomed out, so some could argue that the strong, consistent growth in financial markets was due to his economic policies. Or was it Quantitative Easing post the Global Financial crisis that played the major role in boosting markets, rather than his policies?
The markets' conclusion
What is evident is that neither UK nor US markets are particularly concerned who is elected, as long as they don’t bring extreme policy making and idiosyncrasies with them.
So if the arrival of Truss or Sunak in Number 10 doesn’t herald seismic shifts in economic policy, financial markets should continue to deliver investors healthy returns over the longer-term, with the expected occasional bouts of volatility.
Isaac Stell
Fund Research Manager
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.