Managing currency risk in the Brexit age
Michael McGowan, Managing Director – Foreign Exchange, Bibby Financial Services
We often celebrate high growth companies that deliver impressive returns for investors, but we should also celebrate the companies that grow steadily and sustainably just as loudly. Many small import and export businesses won’t achieve success overnight. Growth is often slow and steady, nurtured by careful planning, and this is no bad thing.
The challenge is that even the most carefully laid plans can be disrupted by major currency volatility. Since the EU referendum political uncertainty has been a strong factor in determining the relative strength of the pound. This is especially pronounced around any important policy announcements, or any crucial votes in the House of Commons, which can see the currency lose several points in just a few minutes.
Rising real wage growth in the UK (which picked up by 3.5% in the Spring) should support greater demand at home, and this is good news for importers. However, this optimism needs to be tempered with a historically low pound which is increasing the cost of bringing goods into the UK.
It is highly likely that the UK will experience continued uncertainty in the run-up to, and beyond, the Brexit deadline. In order to survive, SMEs need to ensure they adapt to this new volatile environment and factor in currency fluctuations into their long-term planning. Simply put, a sit and wait approach just won’t work.
Continued uncertainty caused by Brexit is ensuring that business investment does not rise to previously anticipated levels, while capital expenditure plans will likely remain on hold for most of the year. For larger businesses this is more easily managed, but many SMEs are in the difficult situation of needing to continue to invest in order to remain afloat.
Exporters arguably face less of a challenge, as a weaker pound has made UK exports more competitively priced for foreign buyers. However, exporters also need to adopt a more risk-based approach to managing their currency needs. This means taking more care to manage their day-to-day currency transactions, liquidity and longer-term hedging to smooth the potential bumps in the road ahead.
To do that, SMEs need to use a risk approach to their currency management to sit alongside their long-term business strategy. Hedging risk can be a difficult judgement call for SMEs and if its managed badly can lead to cashflow problems. To avoid this happening, SMEs should seek out professional support to make sure they save on costs without impacting business output and protect themselves from economic and political risks overseas.
To make sure they are getting a good deal on currency, SMEs should consider the following:
- How exposed is my business to currency fluctuations? – An expansion plan that looks like a good deal now, may cause financial difficulties in the future if profit is eroded by currency fluctuations.
- Does my business import or export? –Currency movements affect SMEs in different ways depending on their business model. SMEs that currently engage in import activity but plan to export in the future should consider how their currency management may need to adjust.
- What is the risk to my business? – Some FX tools can expose SMEs to greater risk with the promise of upside later. It is important that SMEs avoid being caught out by unwanted surprises, such as hidden fees.
Currency volatility is part and parcel of the risk you take as a business when operating overseas. SMEs are more vulnerable to these risks, especially with the current political uncertainty surrounding Brexit.
However, it’s not all doom and gloom. Whatever happens with Brexit, the UK has extensive trading links with the rest of the world, so global trade will continue. For those businesses targeting further growth in Asia and the United States, Brexit may not be as much of a challenge. Trade with the EU is unlikely to cease entirely come October 31st, but the upcoming separation may provide the opportunity for businesses to open up to new markets beyond their current operations.