I’m conscious I may be ‘jumping the gun’ here with a UK election still yet to be formally announced. Still, the question of whether UK stocks perform better under a Labour or Conservative government is starting to come up in client conversations.
In this week’s blog, I look at UK stockmarket performance around previous election results, to explore whether there is any discernible trend.
Performance around changes in government
The first observation is that changes in government have generally been positive for UK stock market returns in the immediate aftermath of an election.
As per a recent AJ Bell article, “a study of all 16 general elections since the inception of the FTSE All-Share index [a proxy for UK equities] in 1962 shows that the UK stock market is by no means frightened of a change in government and it may even welcome it.”
The table below compares the average performance of the FTSE All-Share pre- and post-election, where there’s a change in government vs no change:
As you can see, on average, UK stocks have registered double-digit gains in the first year after an election that saw a change in government.
Disclaimer: This does not constitute investment advice. The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a guide to what might happen in the future. Transaction costs, taxes and inflation reduce investment returns.
Performance over the term of government
But what about the overall term of government?
Since 1962, the UK equity market has done better, on average, under Conservative governments vs Labour:
However, these figures are somewhat skewed by the fact that Labour were in power during the Global Financial Crisis of 2007-08, as well as the inflation-induced sell-off of the mid-1970s – two crises that can hardly be blamed on the incumbent government at the time.
Stripping these ‘black swan’ events out, there’s little to distinguish between the two.
This is also illustrated in the chart below which shows the longer-term performance of UK stocks under different governments:
Again, it’s difficult to identify a discernible trend – performance has been fairly consistent over a longer timeframe regardless of ‘who’s in charge’.
For reference, UK stocks have returned an annualised 12% pa (including reinvested dividends) over the last 100 years.
Does the size of a government’s majority matter?
One final point to consider is whether a large government majority matters. This is relevant given that various recent polls have pointed to a crushing victory for Labour at the next election.
In theory, this would give the next government great power to formulate policy and (hopefully) stimulate the economy, without constantly having to curry favour with their own MPs first.
However, historical data shows that the size of a government’s majority is a matter of indifference for local stock markets.
The table below illustrates the nominal return of UK stocks under previous terms of government, along with the size of their majority.
The conclusion here is that there doesn’t seem to be any correlation between government majority and performance.
Conclusion
Ultimately, the question is ‘do politics matter when it comes to investing?’
Beyond a potential short-term uptick, on hopes of a change in fortunes, I would argue ‘not really’. Far more important is the prevailing economic situation at the time – what’s going on with inflation and interest rates, which have greater relevance for the performance of global stock markets.
Disclaimer: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require in order to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
