How a leadership election could impact your investment portfolio

The Labour leadership election may be set to dominate the news agenda and dinner party conversations for the next month or so but it may not have as much of an impact on your investments as many fear.

Sir Keir Starmer resigned as Labour leader this morning, paving way for a leadership election and a new prime minister to be appointed before the summer recess.

Newly-appointed Labour MP Andy Burnham is the only candidate to have thrown his name in the ring so far and it is unclear what his policies will be and who else will challenge.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Stock markets don’t like uncertainty but investors have had to get used to plenty of political upheaval in recent years.

Starmer is the fifth prime minister to resign since 2016, starting with when David Cameron stepped down in the aftermath of the Brexit vote.

The most recent resignation before that was Labour leader Tony Blair in 2007.

But exclusive analysis by wealth manager Quilter for MoneyWeek shows that while these resignations make good headlines, they don’t actually have a drastic impact on stock markets, which could be good news for investor portfolios.

What impact do leadership elections have on financial markets?

Quilter analysed economic indicators such as equities, gilts and the value of sterling against the dollar in the three month build up to a prime minister’s resignation and the three months after.

The analysis showed a mixed picture.

Tim Armitage, investment strategist at Quilter Cheviot, said: “Leadership resignations often prompt headlines about market uncertainty, but history suggests markets do not react to resignations themselves, rather they respond to the underlying risks those resignations expose or resolve.

“Across recent UK history, market reactions tend to fall into three broad patterns – where the resignation follows an external shock, reflects a loss of policy credibility, or occurs against an already dominant macro backdrop.”

UK equities were up by 3.8% in the three months before Tony Blair stepped down in May 2007 and fell 7% in the three month aftermath.

But in some cases, such as the resignations of David Cameron in May 2016 and Liz Truss in October 2022, UK equities actually rose in the three month aftermath by 13.6% and 12.3% respectively.

Armitage added: “In the case of David Cameron, his resignation followed the Brexit referendum, which drove a sharp fall in sterling. While this created immediate volatility, it also supported UK equities and bonds due to the international earnings profile of many listed companies.

“In contrast, Liz Truss’ resignation followed a clear crisis of policy credibility linked to unfunded tax cuts. Markets had already reacted sharply, particularly in gilt yields, and stabilised as her departure removed a key source of uncertainty alongside intervention and reassurance from the Bank of England.”

The impact on sterling has also varied, falling by 7.2% against the dollar when Boris Johnson resigned in July 2022, but rising by 9.2% when Truss left Downing Street.

Armitage said: “Boris Johnson’s resignation came during a period dominated by global macro forces, namely rising inflation and the energy shock following Russia’s invasion of Ukraine, meaning there was little discernible shift in market direction attributable to domestic political change.”

The FTSE 100 and FTSE 250 don’t appear to have been impacted since Starmer’s resignation.

Armitage said: “For investors, the key takeaway is that political change tends to matter most when it alters confidence in fiscal and economic policy. Periods of uncertainty can create short-term volatility, but markets often stabilise quickly once a clearer policy direction emerges.

“Looking ahead, any market reaction to Sir Keir Starmer’s resignation will depend less on the event itself and more on whether it reduces or increases uncertainty around fiscal policy, regulation and economic direction. Early signals on policy continuity and key appointments are likely to be more important for investors than the leadership change alone.”

The key lesson appears to be that time in the market, rather than timing the market, remains the main policy that investors should follow.

Andrew Prosser, head of investments at InvestEngine, said: “Political instability – such as a change in prime minister – can create both risks and opportunities for investors but those who want to grow their money over the long term should not be worried. This upheaval may move markets in the short term, but history has shown markets always recover, and often quicker than expected.

“The investors who tend to come out ahead of periods like this are the ones who stay diversified and stay invested. Our advice is that long-term investors should avoid making knee-jerk decisions, ignore the noise and sit on their hands. Time in the market, as ever, matters more than timing the market.”