Rachel Reeves' time as Chancellor has been a success for investors: Russ Mould
Rachel Reeves is the 21st Chancellor of the Exchequer since the inception of the FTSE All-Share index in 1962 and the sixth member of the Labour Party to hold the post during this period.
She has already outlasted six of her predecessors, all of whom were Conservatives – the ill-fated Ian MacLeod, Kwasi Kwarteng, Nadhim Zahawi, Sajid Javid, John Major and Jeremy Hunt.
From the narrow perspective of investors, her term looks successful, even if Labour backbenchers seem restive and gilt yields are higher.
The FTSE All-Share is up by 24.6 per cent in nominal terms. This equates to a 17.6 per cent gain in real, post-inflation terms.
Cooler inflation and lower interest rates are helping here, both in nominal and real terms, and the rate of change in prices could yet define Reeves’ term as Chancellor, especially if the blockade of the Strait of Hormuz and stand-off between Washington and Iran drag on, with the result that oil prices, and the energy price cap, stay high or go higher still.
The gap between nominal and real, inflation-adjusted returns from the FTSE All-Share index under some chancellors is truly glaring, and this is company that Rachel Reeves may not wish to keep.
Inflation had a withering effect upon investors’ returns from the stock market under Labour’s Denis Healey chancellorship in the mid-to-late 1970s, even if his supporters would argue his record was tarnished by the need to tackle the mess left behind by the Barber boom and oil price spike of the early seventies.
Inflation also chewed up the nominal gains made by the FTSE All-Share under the Tory chancellors Sir Geoffrey Howe and Tony Barber, who were in office between 1979 and 1983 and 1970 and 1974, respectively.
Not all of the inflation that tore through the British economy in 1973-74 could be laid at the door of Mr Barber’s policies, as the 1973 oil price shock had a huge amount to do with it, and this highlights the importance of factors which are beyond the control of any chancellor, no matter how diligent or skilled.
Alistair Darling could hardly have expected to inherit the Great Financial Crisis, which prompted a deep recession and a wicked bear stock market.
Norman Lamont inherited British membership of the Exchange Rate Mechanism, fought to defend the pound and a policy in which he did not believe and oversaw a devaluation of sterling which actually helped the FTSE All-Share to rally. Rishi Sunak had to contend with Covid-19 and the worst recession for three centuries, so perhaps he got the most treacherous hand of all.
Investors, looking at the world through the narrow perspective of their portfolios, will be wanting Rachel Reeves or any potential successors to think back to Barber and Healey. The desire for growth is understandable, especially as rapid nominal growth could help to shrink the debt-to-GDP ratio, if borrowing and base rates are kept under control. But that is a big ‘if.’
Failure to rein in spending could raise fears of fiscal profligacy and – in a worst case – a situation where suppressed interest rates and even money printing come into play as tools to make the aggregate debt manageable. The trajectory of the 10-year gilt yield, and perhaps the gold price, may give investors a useful steer as to the likelihood of such a scenario.
Russ Mould is an investment director at AJ Bell