Sunak’s reign as Number 10 has brought a modest boost to the UK stock market, but context matters

Sunak’s reign as Number 10 has brought a modest boost to the UK stock market, but context matters

On July 4, when Americans celebrated Independence Day, the country that inspired theirs appeared poised to select its own liberty – from 14 years of Conservative Party leadership.

It is generally anticipated that Tory prime minister Rishi Sunak will give Labour leader Keir Starmer the keys to 10 Downing St. during the snap election he called.

While there are many methods to evaluate a leader’s tenure in office, stock market performance is an often cited indicator of that leader’s effectiveness.

Naturally, there needs to be a strong disclaimer that correlation does not imply causality.

For instance, a president or prime minister may take office during the height of a selloff and offer a shining stock market record without altering policies in any way.

Alternatively, equities can rise in expectation of a new leader’s market-friendly policies before struggling to advance further. Even though the prime minister made the correct economic decisions, investors would not have seen much of a return from his or her start date in the history books.

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Furthermore, over the course of several election cycles, there is not much a political leader can do to improve a domestic stock market bereft of popular industries.

Furthermore, the prospects for global growth, over which a British prime minister manifestly has little control, exert a greater influence on the U.K.’s main equity index, the FTSE 100, whose companies, according to LSEG, derive more than 80% of their revenue from sources outside the nation.

The good news for Sunak’s legacy is that, when he took office on October 25, 2022, investor sentiment toward U.K. assets was, to put it mildly, unfavorable.

The former chancellor of the Exchequer replaced Liz Truss, who had only been in No. 10 for 50 days (remember the lettuce?) before being forced to step down due to a poorly thought-out budget proposal that alarmed the markets and sent stocks plunging and bond yields skyrocketing.

The FTSE 100 UK:UKX was trading at 7,013.99 on the eve of Sunak’s arrival at Downing Street. By midmorning on July 4, 2024, in London, it had increased to 8,230.4, representing a 17.3% gain.

This respectable yield was aided by a rebound in the banking industry and other interest-rate-sensitive industries, like real estate, as declining inflation raised the likelihood that the Bank of England will lower borrowing costs this year. With the recent record highs for copper and gold prices (HG00, 2.91%; GC00, 0.22%), miners have also fared handsomely.

A comparable amount, 18.6%, has been gained by the more locally oriented midcap firms in the FTSE 250 UK:MCX.

However, some perspective is necessary. Sunak’s tenure has seen gains of 42% for Germany’s DAX index DX:DAX, 25% for France’s CAC 40 FR:PX1 (which was up much more but saw its own election-related dip), and 46% for Wall Street’s S&P 500 SPX.

Nevertheless, during Sunak’s leadership, the FTSE 100 did reach a new high. This may have been due in part to international investors’ perception that Sunak, a former Goldman Sachs analyst and graduate of Stanford Business School, was a more reliable leader than Truss and Boris Johnson.

“In the wake of Trussonomics, financial markets looked to Mr. Sunak and his appointed Chancellor, Jeremy Hunt, for calm.” and you might argue that’s what they got,” AJ Bell investment director Russ Mould says.

Mould continues, citing the table of FTSE All-Share XX:ASX changes below as evidence. “Mr. Sunak’s relatively short tenure makes some comparisons with prior prime ministers difficult, but stock market investors are unlikely to look upon him too unkindly,” Mould says.

However, recent stock market advances can potentially portend future developments.

For a considerable amount of time, polls have indicated that the Labour Party would win any election that needed to be held before the end of 2024. Rachel Reeves, a former economist at the Bank of England, should be the next chancellor of the Exchequer since her platform promises don’t seem to pose a significant threat to the City of London.

The idea of five years under Reeves seemed to have calmed investors. The market may also believe that the impending change in government will be beneficial for the U.K. economy, according to Kathleen Brooks, research director at XTB. “There have been gains [in shares] for some of the biggest U.K. banks and homebuilders,” she says. “Homebuilders are rising on the back of expectations that they will receive incentives from the next government to build more homes.”