Market InsightFundhouse - Investment Clarity
Do UK Prime Ministers Impact Markets?
Published: 24th October 2022
This Article was Written by: Rory Maguire - Fundhouse
As a UK citizen, it is certainly worrying that we have our fourth Chancellor and (soon to be) third prime minister in three months. These are unsettling times for us all and these themes are dominating news headlines.
We are reminded of two quotes during times like this. The first is from Steven Pinker, renowned Harvard psychologist and linguist: “Journalism is a non-random sample of the worst things that are happening on earth at any given time. When you look at the world through the lens of data, rather than events, it looks much more positive. 1” And Elon Musk, CEO of SpaceX and Tesla acknowledges that world leaders have limited influence, saying: “You’re actually like the captain of a very huge ship and have a small rudder. 2”
We have taken a leaf out of Pinker’s book and gone back to 1990 and assessed how UK equity markets have done during the leadership of various UK prime ministers. Below we show the returns of UK equities during the tenure of each UK prime minister since 1990 (the prime minister, their party and their tenure are shown below the graphs):
Source: Fundhouse and Refinitiv, data to end September 2022, annualised
If you were to cast your mind back to the significant geopolitical events that occurred during each tenure, the returns above may come as something of a surprise. For example, in the subsequent uncertainty of the Brexit vote and negotiations, returns during Theresa May’s leadership were a lot better than David Cameron’s, who presided over a period of economic recovery and relative stability. Additionally, markets did well during Tony Blair’s premiership, when we were in the thick of the wars in Iraq and Afghanistan. Finally, John Major did especially well considering the country was in a major recession in the early 90s and inflation hit 11% by the middle of the decade.
Yet, when we look past the prime minister and rely on data to inform our views, we can reflect on what we see as the drivers of returns over these periods:
- John Major: the 90s saw extreme increases in markets, driven largely by what would later become known as the “Tech Bubble”. And when we have high inflation, as the 90s had, corporate revenues and earnings go up by a commensurate amount and this causes markets to go up at higher rates.
- Tony Blair: he presided over the late stage of the Tech Bubble that saw boom and bust in markets. But the main driver was his tenure: he lasted 10 years, a full market cycle and 8% is about par for a full cycle.
- Gordon Brown: he presided over the Global Financial Crisis and did not have a long enough tenure to achieve long-term average returns.
- David Cameron and Theresa May: together they were leading the country over a full cycle and their returns, between 6% and 9% were close to long-term averages.
- Boris Johnson: the biggest impact was Covid and then the impact of high inflation, driven in large part by the War in Ukraine. But most importantly, his tenure was brief and over the short-term, long-term averages are very unlikely to be achieved.
As you can see, over the longer-term, the factors that drove markets had relatively little to do with who was prime minister. Both Pinker and Musk were right: the headlines tend to create fear and the actual data is quite different to what our expected experience is. Over the long-term, markets deliver returns that are close to their long-term averages, often regardless of what is happening in the outside world. And, by and large, governments have little if any ability to make meaningful change. Their rudder is small and markets end up doing what they do best: over the short term, we see extremes (Tech Bubbles, Global Financial Crises, Covid), but over full cycles returns are pretty normal and indifferent to who the prime minister is.
1 Said to the Financial Times, 24 October 2022.
2 Interview with Freshdialogues.com February 11, 2013.