Are Conservative Governments Better or Worse for Your UK Portfolio? A Historical Market Analysis
Something for the weekend…
When it comes to investing, political landscapes can significantly influence market dynamics. In the UK, the Conservative Party, often associated with right-wing policies, has had a profound impact on the stock market during its tenures. Let’s delve into historical market performance to see how Conservative governments have historically impacted your UK portfolio and whether they’ve been better or worse for your investments.
The Conservative Influence on Markets: A Historical Overview
1. The Thatcher Era (1979-1990) - Economic Reforms and Market Liberalisation:
Margaret Thatcher’s government (1979-1990) is perhaps the most iconic period for Conservatives in the UK. Her policies focused on deregulation, privatisation of state-owned industries, and tax cuts. These measures significantly boosted market confidence and economic activity.
Market Performance: Under Thatcher, the FTSE All-Share Index rose substantially. From 1979 to 1990, the index saw an average annual return of about 17.4%. Key drivers included the privatisation of major industries like British Telecom and British Gas, which created new investment opportunities and attracted capital into the market.
Inflation and Unemployment: While initial years saw high inflation and unemployment, the latter part of her tenure saw stabilisation and economic growth, contributing to a robust stock market performance.
2. The Major Years (1990-1997) - Economic Challenges:
John Major’s term faced economic headwinds, including the aftermath of the early 1990s recession and the European Exchange Rate Mechanism (ERM) crisis, culminating in Black Wednesday in 1992. However, his government continued Thatcher’s pro-market policies.
Market Performance: Despite the challenges, the FTSE All-Share Index grew at an average annual rate of 11.2% from 1990 to 1997. The market’s resilience can be attributed to continued investor confidence in the free-market policies and economic recovery in the mid-1990s.
3. The Cameron/May/Johnson Era (2010-2020) - Austerity and Recovery:
After the 2008 financial crisis, David Cameron’s government (2010-2016) implemented austerity measures aimed at reducing the budget deficit. Theresa May (2016-2019) and Boris Johnson (2019-2020) continued with pro-business policies, albeit with significant political challenges like Brexit.
Market Performance: From 2010 to 2020, the FTSE All-Share Index had an average annual return of approximately 7.2%. The post-2010 recovery was bolstered by fiscal consolidation, low interest rates, and eventually, market optimism around Brexit resolution under Johnson’s government.
Brexit Impact: The 2016 Brexit referendum introduced significant volatility. However, many companies adapted to the new reality, and markets showed resilience, especially following Johnson’s 2019 election victory which promised a more decisive Brexit strategy.
4. The Sunak Government (2022-Present) - Post-Pandemic Challenges:
Rishi Sunak's tenure has been marked by attempts to navigate the post-pandemic economic recovery, rising inflation, and geopolitical tensions.
Market Trends: Under Sunak, the focus has been on stabilising the economy and managing inflationary pressures. Market performance is still unfolding, but the approach has largely been aligned with traditional Conservative values of fiscal responsibility and pro-business policies.
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Conservative Policies and Market Dynamics
1. Pro-Business Stance: - Tax Cuts:
Conservative governments often favour lower corporate and personal taxes, aiming to stimulate economic growth, although the extremely poor timing of Liz Truss’s manifesto showed the vulnerability of this. But, it typically boosts business profits and investor sentiment, leading to higher stock market valuations.
Deregulation: By reducing red tape, Conservative policies generally make it easier for businesses to operate and grow, which can translate into positive market performance.
2. Fiscal Responsibility: - Austerity Measures:
While aimed at reducing deficits, austerity can sometimes dampen economic growth in the short term. However, the long-term goal of fiscal stability is usually seen positively by investors, as it reduces the risk of debt crises.
Government Spending: Conservatives tend to prioritise reducing public spending, which can have mixed effects on markets. Lower government spending can reduce public sector job growth but can also reduce government borrowing costs, which is beneficial for markets.
3. Trade and International Relations: - Free Trade:
Conservative governments often support free trade agreements, which can open up new markets for UK businesses and boost exports, supporting the stock market.
Brexit: The Brexit policy under Conservative governments introduced significant uncertainty but also created new opportunities for UK businesses outside the EU framework.
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Comparative Market Performance: Conservative vs. Labour Governments
To put the Conservative impact in perspective, let’s briefly compare it with Labour government periods:
1. **The Blair/Brown Era (1997-2010) - Economic Boom and Bust:
Tony Blair’s government (1997-2007) oversaw a period of economic expansion, benefiting from global economic growth and financial sector deregulation. However, Gordon Brown’s tenure (2007-2010) was marred by the global financial crisis.
Market Performance: During the Blair/Brown years, the FTSE All-Share Index had an average annual return of 4.1%. The strong performance in the early years was offset by the crash during the financial crisis.
Public Spending: Increased public spending on health, education, and infrastructure initially boosted economic growth, but the financial crisis exposed vulnerabilities, leading to severe market downturns.
2. The Wilson/Callaghan Era (1974-1979) - Economic Struggles:
Labour’s time in power during the 1970s saw economic challenges, including high inflation and unemployment, leading to industrial unrest and market uncertainty.
Market Performance: From 1974 to 1979, the FTSE All-Share Index saw lower growth, reflecting the broader economic difficulties of the period.
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The Verdict: Better or Worse for Your Portfolio? Based on historical analysis:
Better for Market Stability and Growth: Conservative governments have generally been associated with favourable market conditions, driven by their pro-business, low-tax, and deregulation stances. The Thatcher and Major years, in particular, saw significant market growth.
Resilience in Adversity: Even during times of economic challenges or significant political events like Brexit, Conservative policies have often fostered a resilient market environment, helping businesses adapt and thrive.
Mixed Impact from Austerity: While fiscal austerity measures can create short-term economic pain, the long-term focus on fiscal responsibility tends to reassure investors, leading to positive market sentiment.
Sectoral Winners: Financial services, energy, and consumer goods sectors often perform well under Conservative governments due to favourable regulatory and tax policies.
In summary, Conservative governments have historically been better for the UK stock market, providing a stable and growth-oriented environment. While no government can control all market factors, the Conservative focus on business-friendly policies and fiscal prudence generally aligns well with positive market performance. But, of course, it is easy to argue that whatever the outcome on July 4th is, the huge amount of outstanding debt loads, not just in the UK and the ability to service that debt will challenge either party and potentially our poor fate has already been scripted. Investors should always consider broader economic and global factors alongside domestic political policies when making investment decisions.
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Stay Tuned for More
Keep following our insights as we navigate the intricate dance between politics and market performance, helping you make informed decisions to maximise your investment returns.