The Fight To Be PM

The race to be the next Conservative party leader is in full swing and we will find out who the new Prime Minister is on 5th September.

Liz Truss and Rishi Sunak are very different personalities with many opposing economic policies and, like every new Prime Minister, will bring new ideas while trying to distance themselves from old ones.

Truss has been the clear favourite from the start, however she probably would have benefited from a shorter election period. The longer this goes on, the more obvious it becomes she is totally unsuitable as she lurches from one “foot in mouth” disaster to another. My favourite being her hastily deleted Freudian tweet below.

“Man of the people” Rishi however is far from faux pas proof, whether it’s the unearthed video of him saying “I have working class friends, well, not working class but…” or his regular trips to McDonalds with his kids, only to confirm his favourite item is one they haven’t sold for over two and a half years.

But enough of the circus side show, 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 304.51% 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 (Nixon) or a marksman’s aim (JFK). 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 predictable and one slightly more erratic when it came to economic policy (draw your own conclusions on who’s who). Again though, despite these differences, the cumulative total return over 20 years for the S&P 500 has been very strong at 508.14%.

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 S&P 500 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, so long as they don’t bring extreme policy making and idiosyncrasies with them.

So the arrival of Truss or Sunak in Number 10 shouldn’t herald seismic shifts in economic policy, and therefore financial markets should continue to deliver investors positive returns over the longer-term, with the expected occasional bouts of volatility.