Don’t expect Britain’s first hedge fund premiership to be smooth or enjoyable | Ed Conway

Published

3 years ago

October 24, 2022

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Rishi Sunak is not just our first British Asian prime minister, our first Hindu PM.

He is not just the youngest prime minister of the modern era. He is also the youngest since the Napoleonic wars and the first millennial PM.

Just as intriguingly, and possibly even more consequentially, he is Britain’s first hedge fund prime minister too.

Before he was a politician, Mr Sunak worked in finance, both at Goldman Sachs and Chris Hohn’s hedge fund – The Children’s Investment Fund Management. His time in the sector was relatively short, but it nonetheless makes for a CV quite unlike almost every other resident of 10 Downing Street.

Rishi Sunak wins race to be prime minister – live updates

Markets shaped him. And now, at the very point when the rise and fall of certain benchmarks are influencing British politics more than in any era since at least the early 1990s, we have a prime minister who takes those markets unusually seriously.

Markets helped him through the door. For, in the end, what did for Liz Truss was the extraordinary response to her mini-budget, which contributed to a dramatic leap in interest rates on both government debt and mortgages. That in turn triggered a crisis in the gilt markets which underlie Britain’s financial system.

And markets have welcomed him. The news that Boris Johnson was pulling out of the leadership race was followed by a sudden rise in the value of the pound. When trading opened in government bonds this morning, they very quickly rallied. The implied interest rate on these bonds dropped sharply.

And since these markets are the foundations of the rest of the financial system, that had an instant effect on prices elsewhere. After the mini-budget, traders were expecting Bank of England interest rates to rise to well above 6% next year; this morning the expected peak dropped below 5% for the first time since that fiscal event.

At this stage you are doubtless wondering: why on earth does any of this matter? Why are we paying so much attention to the markets? Why (as some might put it) is Britain allowing the whims of the globalist elite – the “Davos consensus” – to shape its policy? Whatever happened to democracy?

And, frankly, you have a point. A democratic country’s policies should be shaped by politicians elected by its people. That’s part of the unwritten social contract that binds us.

But the reality – depressing as it might be – is that the ability of those politicians to act is circumscribed by markets. They can, to give you a straightforward example, only borrow to the extent that investors around the world are willing to lend them money.

Markets matter not because they are right or wrong (that’s not how it works) but because that’s where the money is. And Britain, a country with enormous “twin deficits” on its current account and government account, is more reliant than pretty much any other developed economy on borrowing from those markets. This is just the way it is – ask anyone who worked at Goldman Sachs.

And that logic is worth keeping in mind as Britain’s first hedge fund prime minister takes office and begins to shape policy. Our ability to do what we want to do as a country is dependent on persuading the millions of investors around the world, taking second-by-second decisions on where to put their money, that we are on the right course. Other prime ministers (certainly the last couple) tried to ignore that; it’s unlikely that a “hedge fund prime minister” would.

However, the economic challenges that face Mr Sunak go well beyond the tick-tick-tick of a gilt chart. He enters Number 10 with the UK economy quite plausibly in recession. Energy costs remain at unprecedented highs (even though the wholesale cost of gas has fallen sharply).

So too do food prices and the costs of all sorts of household sundries. Further shocks from the Ukraine war seem highly likely. And on top of this, households will have to contend, in the coming year or so, with a very sharp increase in mortgage costs. Even the slight improvement in those interest rates since Mr Sunak became the odds-on favourite for PM does little to change that.

In short, even in a best-case scenario for the markets, the coming months for the UK economy are likely to feel grim, with households squeezed at every corner – more than they have been for decades. One can argue the toss over who bears the most responsibility for this – whether that’s the Tory party, central banks or, yes, markets. But that’s what we’re heading for.

Mr Sunak spent most of his time as chancellor doling out money during the pandemic. Normally in a recession, governments tend to “loosen fiscal policy” – which is to say, dole out more money.

But that brings us back to markets. Will those investors be relaxed about Britain borrowing more in the coming years? Will they be assured enough by the hedge fund credentials of the PM to give Britain the benefit of the doubt? Will Mr Sunak want to take that risk?

The past few weeks have been an astonishing ride in politics. We are now off the Truss rollercoaster. The Sunak journey might feel different; it might not have the same twists and turns; but don’t expect it to be especially smooth or enjoyable either.

Business

Post Office to unveil £1.75bn banking deal with big British lenders

Published

18 hours ago

April 25, 2025

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Post Office to unveil £1.75bn banking deal with big British lenders

The Post Office will next week unveil a £1.75bn deal with dozens of banks which will allow their customers to continue using Britain’s biggest retail network.

Sky News has learnt the next Post Office banking framework will be launched next Wednesday, with an agreement that will deliver an additional £500m to the government-owned company.

Banking industry sources said on Friday the deal would be worth roughly £350m annually to the Post Office – an uplift from the existing £250m-a-year deal, which expires at the end of the year.

Money latest: ’14 million Britons on course for parking fine this year’

The sources added that in return for the additional payments, the Post Office would make a range of commitments to improving the service it provides to banks’ customers who use its branches.

Banks which participate in the arrangements include Barclays, HSBC, Lloyds Banking Group, NatWest Group and Santander UK.

Under the Banking Framework Agreement, the 30 banks and mutuals’ customers can access the Post Office’s 11,500 branches for a range of services, including depositing and withdrawing cash.

The service is particularly valuable to those who still rely on physical cash after a decade in which well over 6,000 bank branches have been closed across Britain.

In 2023, more than £10bn worth of cash was withdrawn over the counter and £29bn in cash was deposited over the counter, the Post Office said last year.

A new, longer-term deal with the banks comes at a critical time for the Post Office, which is trying to secure government funding to bolster the pay of thousands of sub-postmasters.

Reliant on an annual government subsidy, the reputation of the network’s previous management team was left in tatters by the Horizon IT scandal and the wrongful conviction of hundreds of sub-postmasters.

A Post Office spokesperson declined to comment ahead of next week’s announcement.

Business

Trump trade war: How UK figures show his tariff argument doesn’t add up

Published

18 hours ago

April 25, 2025

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Trump trade war: How UK figures show his tariff argument doesn't add up

As Chancellor Rachel Reeves meets her counterpart, US Treasury secretary Scott Bessent to discuss an “economic agreement” between the two countries, the latest trade figures confirm three realities that ought to shape negotiations.

The first is that the US remains a vital customer for UK businesses, the largest single-nation export market for British goods and the third-largest import partner, critical to the UK automotive industry, already landed with a 25% tariff, and pharmaceuticals, which might yet be.

In 2024 the US was the UK’s largest export market for cars, worth £9bn to companies including Jaguar Land Rover, Bentley and Aston Martin, and accounting for more than 27% of UK automotive exports.

Little wonder the domestic industry fears a heavy and immediate impact on sales and jobs should tariffs remain.

Money latest: ’14 million Britons on course for parking fine this year’

American car exports to the UK by contrast are worth just £1bn, which may explain why the chancellor may be willing to lower the current tariff of 10% to 2.5%.

For UK medicines and pharmaceutical producers meanwhile, the US was a more than £6bn market in 2024. Currently exempt from tariffs, while Mr Trump and his advisors think about how to treat an industry he has long-criticised for high prices, it remains vulnerable.

The second point is that the US is even more important for the services industry. British exports of consultancy, PR, financial and other professional services to America were worth £131bn last year.

That’s more than double the total value of the goods traded in the same direction, but mercifully services are much harder to hammer with the blunt tool of tariffs, though not immune from regulation and other “non-tariff barriers”.

The third point is that, had Donald Trump stuck to his initial rationale for tariffs, UK exporters should not be facing a penny of extra cost for doing business with the US.

The president says he slapped blanket tariffs on every nation bar Russia to “rebalance” the US economy and reverse goods trade ‘deficits’ – in which the US imports more than it exports to a given country.

That heavily contested argument might apply to Mexico, Canada, China and many other manufacturing nations, but it does not meaningfully apply to Britain.

Figures from the Office for National Statistics show the US ran a small goods trade deficit with the UK in 2024 of £2.2bn, importing £59.3bn of goods against exports of £57.1bn.

Add in services trade, in which the UK exports more than double what it imports from the US, and the UK’s surplus – and thus the US ‘deficit’ – swells to nearly £78bn.

That might be a problem were it not for the US’ own accounts of the goods and services trade with Britain, which it says actually show a $15bn (£11.8bn) surplus with the UK.

You might think that they cannot both be right, but the ONS disagrees. The disparity is caused by the way the US Bureau of Economic Analysis accounts for services, as well as a range of statistical assumptions.

“The presence of trade asymmetries does not indicate that either country is inaccurate in their estimation,” the ONS said.

That might be encouraging had Mr Trump not ignored his own arguments and landed the UK, like everyone else in the world, with a blanket 10% tariff on all goods.

Trade agreements are notoriously complex, protracted affairs, which helps explain why after nine years of trying the UK still has not got one with the US, and the Brexit deal it did with the EU against a self-imposed deadline has been proved highly disadvantageous.

Business

Public failed by water regulators and government as bills rise, spending watchdog says

Published

1 day ago

April 25, 2025

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Public failed by water regulators and government as bills rise, spending watchdog says

Water regulators and the government have failed to provide a trusted and resilient industry at the same time as bills rise, the state spending watchdog has said.

Public trust in the water sector has reached a record low, according to a report from the National Audit Office (NAO) on the privatised industry.

Not since monitoring began in 2011 has consumer trust been at such a level, it said.

At the same time, households face double-digit bill hikes over the next five years.

The last time bills rose at this rate was just before the global financial crash, between 2004-05 and 2005-06.

Regulation failure

All three water regulators – Ofwat, the Environment Agency and Drinking Water Inspectorate – and the government department for environment, food and rural affairs (Defra) have played a role in the failure, the NAO said, adding they do not know enough about the condition or age of water infrastructure and the level of funding needed to maintain it.

Since the utilities were privatised in 1989, the average rate of replacement for water assets is 125 years, the watchdog said. If the current pace is maintained, it will take 700 years to replace the existing water mains.

Water firms have grappled with leaky pipes and record sewage outflows into UK waterways in recent years, with enforcement action under way against all wastewater companies.

Despite there being three regulators tasked with water, there is no one responsible for proactively inspecting wastewater to prevent environmental harm, the report found.

Instead, regulation is reactive, fining firms when harm has already occurred.

Financial penalties and rewards, however, have not worked as water company performance hasn’t been “consistent or significantly improved” in recent years, the report said.

‘Gaps, inconsistencies, tension’

The NAO called for this to change and for a body to be tasked with the whole process and assets. At present, the Drinking Water Inspectorate monitors water coming into a house, but there is no entity looking at water leaving a property.

Similarly no body is tasked with cybersecurity for wastewater businesses.

As well as there being gaps, “inconsistent” watchdog responsibilities cause “tension” and overlap, the report found.

The Environment Agency has no obligation to balance customer affordability with its duty to the environment when it assesses plans, the NAO said.

Company and investment criticism

Regulators have also been blamed for failing to drive enough funding into the water sector.

From having spoken to investors through numerous meetings, the NAO learnt that confidence had declined, which has made it more expensive to invest in companies providing water.

Even investors found Ofwat’s five-yearly price review process “complex and difficult”, the report said.

Financial resilience of the industry has “weakened” with Ofwat having signalled concerns about the financial resilience of 10 of the 16 major water companies.

Most notably, the UK’s largest provider, Thames Water, faced an uncertain future and potential nationalisation before securing an emergency £3bn loan, adding to its already massive £16bn debt pile.

Water businesses have been overspending, with only some extra spending linked to high inflation in recent years, leading to rising bills, the NAO said.

Over the next 25 years, companies plan to spend £290bn on infrastructure and investment, while Ofwat estimates a further £52bn will be needed to deliver up to 30 water supply projects, including nine reservoirs.

What else is going on?

From today, a new government law comes into effect which could see water bosses who cover up illegal sewage spills imprisoned for up to two years.

Such measures are necessary, Defra said, as some water companies have obstructed investigations and failed to hand over evidence on illegal sewage discharges, preventing crackdowns.

Meanwhile, the Independent Water Commission (IWC), led by former Bank of England deputy governor Sir Jon Cunliffe, is carrying out the largest review of the industry since privatisation.

What the regulators and government say?

In response to the report, Ofwat said: “The NAO’s report is an important contribution to the debate about the future of the water industry.

“We agree with the NAO’s recommendations for Ofwat and we continue to progress our work in these areas, and to contribute to the IWC’s wider review of the regulatory framework. We also look forward to the IWC’s recommendations and to working with government and other regulators to better deliver for customers and the environment.”

An Environment Agency spokesperson said: “We have worked closely with the National Audit Office in producing this report and welcome its substantial contribution to the debate on the future of water regulation.

“We recognise the significant challenges facing the water industry. That is why we will be working with Defra and other water regulators to implement the report’s recommendations and update our frameworks to reflect its findings.”

A Defra spokesperson said: “The government has taken urgent action to fix the water industry – but change will not happen overnight.

“We have put water companies under tough special measures through our landmark Water Act, with new powers to ban the payment of bonuses to polluting water bosses and bring tougher criminal charges against them if they break the law.”

Water UK, which represents the water firms, has been contacted for comment.