James Bennett of Aston Currency Management shares his thoughts on how best to assess risk when looking to expand in the current market.
In recent times political change, or the promise of, has brought around a fundamental change in market conditions and circumstances that has had a clear impact on the UK export market. It has created a glut of demand across many sectors on the back of a weakened Sterling that many have enjoyed and embraced.
Undoubtedly this is a sign of the quality led production here in the UK and our global brand for innovation. Some would perhaps point out that this supports the case for political freedom from Europe – however, the fact that Sterling is at a historical low cannot be overlooked.
This is clearly a time to embrace opportunity, however there does lie within an inherent danger here. Companies looking at full order books and how to increase capacity internally to match this may be making financial miscalculations. To budget for expansion with a large part of the calculation linking demand to an external factor such as currency without considering hedging this risk is at best hopeful, at worst a gamble.
Expansion plans need to consider price elasticity of the underlying product in comparison to the exchange rate as a base calculation before they can be seriously considered and sadly, in today’s world, this is largely dictated by the world of politics, not economics. So, how can you factor in such a human element? The answer is, unfortunately, that you can’t and you need to counter this by putting in a risk mitigation strategy for currency as a starting point.
There may be an unparalleled level of expertise in your company about production techniques, material forecasting, logistics and marketing that makes you the leading exporter in your sector. However, to fail to plan around an external shock such as currency adjustments can negate even the most detailed of expansion plans.
So before taking the leap, sit down and have a think. How much would demand fluctuate were Theresa May to announce that Brexit was cancelled and Sterling soared in value? Have you planned to counter at least some of this change potentially in prices to your customers, or how much would it eat into your margin? Should you offer your product to all clients in their local currency to allow for this, and how can you manage the potential change to your profit margin if you do so? Or, what currency techniques can you use to avoid this danger? These are all key questions to review in this current market.
Britain is a country built on exports historically, but rarely has there been a time when currency planning to support this vital part of the economy has been more vital. Get it right, and there is no reason why this current export opportunity cannot continue through Brexit and beyond. Get it wrong and hard work and skill sets can be made almost irrelevant. Let’s make sure to capitalise on this window and keep the heart of the British economy beating.
