The PM index: which prime minister has been best for shares?

As the General Election approaches, politicians on all sides will no doubt claim to be the best custodians of the UK economy. Brexit might be front of mind for many voters, but economic competence has always been a key vote winner – and loser. So for investors, what can history tell us?

You’ve probably heard of the Big Mac index[1] – an indicator for the purchasing power of an economy. We’ve crunched the numbers to come up with the PM Index – an analysis of how the FTSE All Share Index has fared under each prime minister since 1970. By adjusting for inflation, we have assessed how investors in UK equities fared during each political era. Over the 47-year period analysed, the FTSE All-Share has returned 6.1% a year in real terms.

Theresa May tops the list, but with a major caveat. Since she became Prime Minister on 13 July 2016, Mrs May has presided over an 18.1% surge in the FTSE All-Share index. But with such a short track record, it’s perhaps unwise and unfair to compare her to her predecessors.

Judged over the long term, John Major has been the most successful Prime Minister for investors in UK shares since 1970. During his seven years in Downing Street, the FTSE All-Share ticked up 13.7% a year after taking inflation into account. This steady upward trajectory was barely checked by the UK’s abrupt exit from the European Exchange Rate Mechanism (ERM) on ‘Black Wednesday’, 16 September 1992.

Jim Callaghan leads the Labour charge. In just three years from 1976 to 1979, the FTSE All-Share weathered the Winter of Discontent to rise by an average of 12.2% a year, even after the effects of so-called ‘stagflation’ running at 12% per year as well.

During Margaret Thatcher’s 11 years in Downing Street, the FTSE All-Share surged by an incredible 555%! Aside from privatising the likes of British Telecom and British Gas, Mrs Thatcher deregulated London’s financial markets in the ‘Big Bang’ of 1986. After inflation, however, real returns were less stratospheric, at 9.1% per year.

Investors in the FTSE All-Share will have lost money, after inflation, during the tenures of three prime ministers – most recently Gordon Brown, whose premiership (2007–2010) coincided with the financial crisis.

However, it was during Harold Wilson’s second stint in Number Ten (1974-1976) that UK shares had their worst run during the period analysed. With inflation running at over 20% per year decimating investment gains, the FTSE All-Share returned -6.9% a year, in real terms.

What can we learn from this?

Markets don’t move in straight lines, and we’ve seen time and again over the years how political uncertainty and the media noise that often surrounds elections, can create opportunities for investors. After Black Wednesday in 1992, the falling value of the pound on foreign exchanges helped propel the FTSE to new heights. Much the same thing has happened in the wake of the Brexit vote.

In politics as with investing, timing and looking at the facts is critical. While Theresa May’s tenure in Downing Street has so far coincided with a strong run for shares, she has only been Prime Minister for 10 months.

As we are increasingly bombarded by media commentary it can be dangerous to read too much into every twist and turn in the market; it causes confusion and can distract investors from the issues that really matter. We need to step away from the noise and judge investment performance over at least a multi-year time frame.

[1] The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in January 2017 was $5.06; in China it was only $2.83 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 44% at that time.