The political landscape in the UK has shifted once again following Sir Keir Starmer's resignation as Labour leader this morning, paving the way for a leadership election. This marks the fifth prime ministerial or major party leader resignation since 2016, a period characterised by considerable political flux. While such events often dominate news cycles and spark conversations about uncertainty, financial experts suggest their direct impact on investment portfolios may be less severe than commonly perceived.
Andy Burnham, a newly-appointed Labour MP, has been the first to declare his candidacy, though his policy platform remains unclear, and further contenders are expected to emerge. Historically, stock markets tend to dislike uncertainty. However, investors have become accustomed to frequent political upheaval in recent years, beginning with David Cameron's departure after the Brexit referendum and including the more recent resignations of Boris Johnson and Liz Truss.
Exclusive analysis conducted by wealth manager Quilter for MoneyWeek indicates that while leadership resignations create significant headlines, they do not consistently lead to drastic impacts on stock markets. Quilter's study examined economic indicators such as equities, gilts, and the value of sterling against the US dollar in the three months before and after a prime minister's resignation, revealing a varied picture.
Tim Armitage, an investment strategist at Quilter Cheviot, noted that market reactions typically fall into three patterns: following an external shock, reflecting a loss of policy credibility, or occurring against an already dominant macroeconomic backdrop. For instance, UK equities rose by 13.6% in the three months following David Cameron's resignation in May 2016 and by 12.3% after Liz Truss stepped down in October 2022. In Cameron's case, the fall in sterling post-Brexit supported UK equities due to the international earnings of many listed companies. Truss's departure, conversely, stabilised markets that had already reacted sharply to her unfunded tax cuts, with the Bank of England's intervention also playing a crucial role.
The impact on sterling has also been inconsistent. While it fell by 7.2% against the dollar when Boris Johnson resigned in July 2022, it rose by 9.2% after Liz Truss left office. Johnson's resignation occurred during a period dominated by global forces like rising inflation and the energy crisis following Russia's invasion of Ukraine, meaning domestic political change had little discernible impact on market direction. Currently, the FTSE 100 and FTSE 250 indices do not appear to have been significantly affected since Sir Keir Starmer's resignation.
For investors, the key takeaway is that political change primarily matters when it alters confidence in fiscal and economic policy. While periods of uncertainty can generate short-term volatility, markets often stabilise rapidly once a clearer policy direction emerges. Any market reaction to Sir Keir Starmer's resignation will likely hinge on whether it reduces or increases uncertainty regarding fiscal policy, regulation, and the overall economic direction of the country.