Your investment portfolio may be affected by a leadership election

Prime minister resignations are becoming more common in the markets

This is how your investments might be affected by the most recent political unrest.

For the next month or so, the Labour leadership election may dominate the news agenda and dinner party discussions, but it might not have as much of an effect on your investments as many people worry.

A leadership election and the appointment of a new prime minister prior to the summer break were made possible by Sir Keir Starmer's resignation as leader of the Labour Party this morning.

Andy Burnham, a recently appointed Labour MP, is the only contender who has entered the race thus far; it is unclear what his policies will be and who else will run against him.

Although investors have had to adjust to a lot of political turmoil in recent years, stock markets dislike uncertainty.

Watch the entire video here. Since David Cameron's resignation following the Brexit vote in 2016, Starmer is the fifth prime minister to step down.

Prior to that, Tony Blair, the leader of the Labour Party, resigned in 2007.

However, wealth manager Quilter's exclusive analysis for BFIA reveals that although these resignations garner attention, they don't really have a significant effect on stock markets, which could be advantageous for investor portfolios.

How do elections for leadership affect the financial markets?

In the three months leading up to and following a prime minister's resignation, Quilter examined economic indicators like stocks, gilts, and the value of sterling relative to the dollar.

The results of the analysis were conflicting.

Investment strategist Tim Armitage of Quilter Cheviot stated: "Market uncertainty is frequently the subject of headlines following leadership resignations, but historical evidence indicates that markets react to the underlying risks that these resignations either expose or resolve rather than the resignations themselves.

"In recent UK history, market responses have generally followed one of three patterns: the resignation occurs in the context of an already dominant macro backdrop, a loss of policy credibility, or an external shock."

In the three months prior to Tony Blair's resignation in May 2007, UK stocks had increased by 3.8%, and in the three months following his resignation, they had decreased by 7%.

However, in certain instances, such as the resignations of Liz Truss in October 2022 and David Cameron in May 2016, UK stocks actually increased by 12.3 percent and 13.6 percent, respectively, in the three months that followed.

Armitage continued: "David Cameron's resignation came after the Brexit referendum, which caused the value of sterling to plummet. Due to the international earnings profile of many listed companies, this caused immediate volatility but also helped UK bonds and equities.

Liz Truss's resignation, on the other hand, came after an obvious crisis of policy credibility associated with unfunded tax cuts. Along with intervention and assurances from the Bank of England, her departure eliminated a major source of uncertainty, and markets, which had already reacted sharply, especially in gilt yields, stabilized."

When Boris Johnson resigned in July 2022, the value of sterling fell by 7.2 percent against the dollar, but when Truss left Downing Street, it increased by 9.2 percent.

"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," stated Armitage."

Since Starmers' resignation, the FTSE 100 and FTSE 250 don't seem to have changed.

"The most important lesson for investors is that political change tends to matter most when it alters confidence in fiscal and economic policy," stated Armitage. Short-term volatility can be caused by periods of uncertainty, but once a clearer policy direction is established, markets frequently stabilize swiftly.

"Looking ahead, the market's response to Sir Keir Starmers' resignation will depend more on whether it lessens or increases uncertainty regarding fiscal policy, regulation, and economic direction than on the event itself. Investors are likely to place greater importance on early signals regarding policy continuity and important appointments than on the leadership change alone."

The most important lesson seems to be that the primary rule that investors should adhere to is time in the market, not timing the market.

"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 time should not be concerned," stated Andrew Prosser, head of investments at InvestEngine. Short-term market movement may result from this disruption, but historically, markets have always recoveredoften more quickly than anticipated.

"Those who remain invested and diversified are the ones who typically emerge ahead of such times. We advise long-term investors to sit on their hands, ignore the noise, and refrain from making snap judgments. As always, time in the market is more important than timing the market."