THE UK has a long history of having an outward looking economy and an ever-increasing number of companies are looking to garner profits abroad. But added to the regulatory and logistical problems of trading overseas, changes to the value of currencies can warp balance sheets. The volatility of the ongoing Eurozone crisis could present a risk to companies that many will need to hedge against. Although currency fluctuations can benefit a company as much as hinder it, most people running firms, with the resources to take action, would rather not gamble on the fallout of the monetary and fiscal policies of central bankers and politicians.
Chris Towner of HiFX explains: “During the credit crisis of 2008, foreign exchange risk became a risk too large to ignore for corporates, with sterling weakening by 25 per cent on a trade weighted basis.” Yannick Naud of Glendevon King Asset Management notes that ever since the 2008 crisis started to recede, price volatility in euro-sterling has more or less stayed around the 10 per cent mark. He says: “This level of volatility could appear low at first, but we have to keep in mind that it is still double the average level before 2008.” Adrian Lee of Adrian Lee & Partners says many UK businesses have been lulled into a false sense of security with the relatively stable exchange rate, but since the Greek crisis volatility has been high. There is a clear and present danger that the sovereign debt crisis could overwhelm the euro to the point of destruction. Chris Beauchamp of IG Index says: “It’s hard to escape the conclusion that the outlook for the euro is quite bleak at the moment.”
TO HEDGE OR NOT TO HEDGE...
Research undertaken by HiFX involving primary financial decision makers in companies with FX exposure revealed that only 17 per cent of businesses hedge their foreign exchange currency, although currency fluctuations are “high up on the list of concerns for businesses over the next six-12 months.” Naud thinks given the current competitive environment and the general squeeze on profit margins, companies trading with continental Europe will need to hedge their forex exposure, in order to have some bottom line certainty. He says large companies are already equipped with sophisticated teams within their finance departments, hedging risk via currency forwards or long term currency swaps, but SMEs could find this situation challenging, especially at a time when trade financing from banks and export credit agencies is now less broadly available. However, Towner cautions “there is also the risk that businesses hedge too much” and that it is important businesses consider what their competition is doing.