Liz Truss’ first task is obvious: announce a plan on energy prices to get the country through the winter. The second task, though, is almost as important: avoid scaring the financial markets. On that score, Deutsche Bank’s currency analysts were merely stating the obvious in a note on Monday when they greeted the new prime minister by saying the risk of a balance of payments crisis in the UK “should not be underestimated” and that “policy announcements over the next few weeks will be key in determining the risk of extreme macro outcomes”.
A remarkable feature of the overlong leadership campaign is that the sketch of “Trussonomics” has barely graduated from soundbites about a “pro-growth” mindset and “supply-side reforms”. Both ambitions might be considered virtuous goals, but the accompanying promise of unfunded tax cuts is what worries markets. Today’s pressing problems are a widening current account deficit, the highest inflation in the G10 group of rich nations, and a large chunk of national debt payments tied to interest rates. Looser fiscal policy is not the orthodox prescription to those problems.
The great hope of the Truss camp, it seems, is that markets will smile benignly and embrace a vision that imagines a bigger deficit being part of a step towards a permanently higher growth trajectory for the UK economy. That, at least, is the gamble. But the plan is more likely to be received with an open mind if investors also know that the Bank of England will continue to be the guardian of monetary policy.
The campaigning hints and nudges that Threadneedle Street’s mandate could be reviewed must sound alarming from abroad. They haven’t been heard from any other incoming PM since independence was granted in 1997. For the past 25 years, the UK’s credibility in financial markets has been closely bound to the notion that the Bank is beyond political meddling.
In his warmup routine in the FT on Monday, Kwasi Kwarteng, the likely next chancellor, said Truss’s administration was “fully committed” to independence, but added that “coordination across monetary policy and fiscal policy is important”. Was the second half of that statement an attempt to calm nerves, or does it indicate a new approach? Clarity is essential – and quickly. Markets tend not to tolerate ambiguity for long.
Aston Martin’s profit days are still long way off
“We don’t need any more money at all. Let me be crystal clear, black and white: we do not need money,” said Lawrence Stroll, executive chair of Aston Martin, as recently as February.
The messaging, to put it mildly, has moved on. In July, Saudi Arabia’s Public Investment Fund was recruited as major investor, pouring £78m into the tank. Now comes the main event, flagged at the same time: a full-octane rights issue to raise £576m, or more than the car company’s entire stock market value. For a business that supposedly had a clear financial road ahead in February, this is a major event.
In fact, it’s the third equity fundraising after Stroll’s original rescue of Aston Martin in early 2020. The Canadian billionaire was unlucky in that he pounced just before Covid upset everything, but he’s now halfway into a five-year turnaround programme and the challenge of turning Aston Martin into the “most desirable ultra-luxury British performance brand” still looks formidable.
Up to half of the proceeds of the combined £654m fundraising will go to paying down debts of £1.23bn at the last balance sheet date. That will remove £30m of cash interest payments this year, but only from a previous projection of £195m. The real test, then, lies ahead: Aston Martin’s ability to refinance borrowings taken on at nose-bleed rates pre-2020. Success or failure won’t properly emerge until 2023 or 2024.
Stroll can point to progress under the bonnet: the group looks to have weaned itself off its addiction to making too many cars. One can also admire his ability to round up high-profile backers (not just the Saudis but also Mercedes-Benz) and his willingness to keep ploughing more of his fortune into Aston Martin; his Yew Tree consortium is taking up its rights in full.
But the magical day when Aston Martin (currently loss-making) emerges with £2bn of revenue and £500m of operational profits still looks a long way off. The rights issue has it pencilled in for 2024-25, by which time the conversion to electric vehicles will be further down the track. At Aston Martin, targets have a habit of being revised.
