- New prime minister is off to a quick start with first policy changes
- Markets now await further initiatives
- Sterling and the 10-year gilt yield will be key barometers of markets’ response to the new government
- Lessons from the UK’s first fifty-eight PMs could also help investors decide whether Andy Burnham has what it takes
“Andy Burnham is now confirmed as the nation’s seventh prime minister in ten years, with John Healey as our ninth Chancellor of the Exchequer in the same time span, and the electorate and financial markets alike now wait to see what policy initiatives may follow,” says AJ Bell investment director Russ Mould.
“Sterling and the benchmark 10-year gilt yield will be barometers that show what markets think of the new administration, while a delve into the history books may help investors and traders decide whether the UK’s fifty-ninth PM has what it takes to make a better job of it than many of his predecessors.
“The good news is the recent run of five PMs in four years – Johnson, Truss, Sunak, Starmer and now Burnham – is not the worst on record. Five Prime Ministers took office in 1834-35, in the form of Grey, Melbourne, Wellington, Peel and Melbourne again, and we had four leaders in 1827-28, with Liverpool, Grey, Canning and Goderich.
“Nevertheless, the current record is not one that will fill anyone with a great deal of confidence in the nation’s political and economic direction.
“This can be seen, from the narrow perspective of financial markets, in two ways, and anyone wishing to assess what the markets think of the new Burnham government and its agenda can use both as a benchmark.
“The first is sterling. The pound is still yet to return to the levels seen before the Brexit vote in summer 2016, namely $1.48 and €1.3050. The electorate voted to leave the EU, but the financial markets have never really warmed to the concept, or the political and practical difficulties associated with implementing the withdrawal. Capital goes where it feels welcome, and capital seems to have taken the view that Brexit made it feel less welcome than before, with the result that markets are less comfortable owning sterling-denominated assets.
Source: LSEG Refinitiv data
“The second is the government’s cost of borrowing, where a good benchmark is the yield on the 10-year government bond, or gilt. The less comfortable markets are with a country’s political and economic outlook, the more they will charge it to borrow (and vice-versa). The UK 10-year gilt yield is hovering around 5.00%, and it is threatening to move above that threshold for only the fourth time since 2007.
Source: LSEG Refinitiv data
“In mitigation, most governments’ borrowing costs have risen since 2016, because interest rates have finally risen from the rock-bottom levels of the 2010s and early 2020s, in response to the inflation that followed Covid, Russia’s attack on Ukraine and now the latest Middle Eastern conflict.
“However, the UK has the highest 10-year borrowing cost of any member of the G7.
Source: LSEG Refinitiv data
“The UK has also seen the biggest increase in 10-year gilt yields across the G7 since the June 2016 EU referendum vote.
Source: LSEG Refinitiv data. Since 23 June 2016.
“Most damningly, the yield on UK 10-year gilts is higher than the yield on the equivalent borrowing in Portugal, Italy, Ireland, Greece or Spain, the EU members whose finances were in tatters during the early 2010s amid the European debt crisis.
“This is not just a function of the UK’s febrile politics, given the impact of Covid, Ukraine, and Iran and more, but the UK’s brittle national finances are not helpful here, either. A debt-to-GDP ratio close to 100% currently leads to an annual government interest bill of over £100 billion, more than we spend on defence and a figure that soaks up around a tenth of the revenues generated from taxation.
Source: LSEG Refinitiv data
“If sterling starts to rise – something that could help to put a lid on inflation, at least to some degree – and Mr Burnham helps to create an environment whereby bond investors are happy to own UK government gilts at lower yields then he may well be doing a good job, all other things being equal.
“Investors will no doubt look to the stock market, too, although the UK stock market gets more than half of its profits from overseas, so the FTSE All-Share index may not be an entirely reliable guide to what is happening here, either politically or economically.
“Sir Keir Starmer may have lost the confidence of the Labour Party and the electorate, but the UK stock market did not seem to mind him too much. The FTSE All-Share rose by 26.7% during his 745 days in office and by 19.5% in real, inflation-adjusted terms, which is not a bad return, all things considered, and one that stands scrutiny compared to his modern-day predecessors.
Source: LSEG Refinitiv data, ONS data
“Events will have taken a hand in how UK equities performed during modern day premierships.
“James Callaghan had to battle the inflation that followed an oil price shock, John Major confronted a recession and the problems caused by the Exchange Rate Mechanism, and Tony Blair’s second term coincided with the bursting of the technology stock market bubble. Gordon Brown had to tackle the Great Financial Crisis, Theresa May had to try and sort out Brexit and Covid-19 landed in Boris Johnson’s lap.
“However, some woes were self-inflicted, politically or economically, as Harold Wilson lacked a clear strategy, Blair failed to implement wider reforms and tripped himself up on Iraq, Boris Johnson’s premiership dissolved amid scandal and recrimination and Liz Truss, rightly or wrongly, was widely seen as being responsible for her own swift demise, thanks to a poorly communicated, and potentially unfunded, package of tax cuts and deregulation. A lack of a plan, frequent U-turns and poor choices for key appointments did for Sir Keir Starmer.
“Whether you like him or his policies or not, it is understandable that Mr Burnham desires to plan for the long-term and, to use his words, make politics work better and personally act as a circuit-breaker after the recent torrid pace of change in Downing Street.
“Sterling and the gilt market will be key financial barometers of success or failure, from the perspective of investors, who also may like to judge Mr Burnham’s initial policy pronouncements and moves in the context of the nine of his fifty-eight predecessors whom historian Sir Anthony Seldon describes, in his opinion, as genuinely successful ‘agenda changers’ – Sir Robert Walpole, William Pitt the Younger, Sir Robert Peel, Viscount Palmerston, William Gladstone, David Lloyd George, Sir Winston Churchill, Clement Attlee and Margaret Thatcher.
“In his book, The Impossible Office?, Sir Anthony argues that all nine had the same qualities:
- Prior experience in government (and Mr Burnham’s five previous Westminster posts and time as mayor of Manchester means he stacks up well against many of his most recent predecessors)
- A clear and credible agenda
- A strong moral compass
- And an iron will, to take difficult decisions and keep at it when the going gets tough
“Only time will tell if he fits the bill, but without those four, Sir Anthony Seldon’s work suggests Mr Burnham has little chance of achieving much of his political and personal agenda.”
