VOLATILITY in financial markets is at a record high. Businesses must wake up to the very real consequences of current global events and the potential impact on their bottom line. Volatility means risk and uncertainty, and uncertainty is a serious concern for business. These wild swings in commodity, equity and currency markets can and have created major problems for those businesses that have not had the support and advice to steer them through it.
For instance, for businesses that import or export there have been huge currency swings, and more are set to follow. Your profits could be wiped out unless you hedge effectively against these adverse movements. This week alone we have seen how quickly markets can turn. Greece has thrown the latest bailout package back in the policy makers’ faces. A disorderly default by Greece is now a likely event. Greece is not a Lehmans, but an entire country. If one country goes, where does that leave other peripheral countries within the Eurozone? Contagion is spreading like wild fire, evidenced by Italian borrowing costs reaching euro-era highs this week.
This volatility also affects small business in other ways. Looking at what happened when Lehmans collapsed, we saw a dramatic reduction in bank lending, spending by all sorts of businesses and the world tip into recession. Businesses need to conserve cash and not have bad creditors on their books if they are to survive any re-occurrence of this.
Europe is the UK’s largest trading partner and turmoil in Europe has a direct impact on our own economy. Add this to the slowdown in the UK and the lack of a clear recovery, evidenced by a further round of quantitative easing only recently.
Emerging markets not long ago were all surging through the turmoil, but now are starting to slow. China notably saw a drop in growth figures only recently. This is significant as China is seen as an engine for growth. The US as well is still in trouble, with policy-makers there hinting at a third round of quantitative easing to stimulate the world’s largest economy.
The current market situation is so concerning that even Qatar, with its huge exposure to oil, has started to hedge its oil prices. This is something that very rarely happens, and is a strong indication of how serious the situation in the world market is. If countries are hedging in this way, businesses certainly should be.
All of these events are current and real concerns. The issues creating volatility are not going away in a hurry. Many would argue that current concerns are on a much larger scale than during the 2008 crisis. If we see nations within the Eurozone default, there will be ripple effects throughout the world. We are talking entire countries going bankrupt, not just a bank or two.
Britain’s businesses simply have no choice but to take action before it’s too late. In 2008 sterling lost 42 per cent of its value against the US dollar and 35 per cent against the euro. For businesses importing products from China or Europe, who had not hedged against these moves, it was catastrophic and in some cases the Lehmans path was followed.
Take action now and implement protection. Secure your profits for next year by looking to what others are doing and also thinking about what happened just three years ago when Lehmans collapsed. Being over-exposed to another 2008 simply should not be an option.
Stewart Blake is chief executive of Global Reach Partners.