Hamilton Court FX COO advises how import & export businesses can ring-fence foreign exchange exposure in times of economic turbulence, as we move towards the BREXIT deadline
A1. Brexit has caused the Pound to remain undervalued for the last four years. Adding to the weakness in the Pound, there have been bouts of heightened volatility around the multitude of risk events such as article 50 extension, general elections, trade deal negotiation announcements etc.
The impact on businesses is that they struggle to plan. Brexit is such a large variable for clients that do business not just with the EU, but globally. The proactive communication from Government has been poor and though we may be seeing this start to change, we're very close to December 31st and making firm plans for 2021 would normally start at the beginning of 2020, if not before.
Q2. Why a company should not sit on the fence and do nothing?
A2. Doing nothing in the hope that rates will change or rally and that perhaps Government indecision/leadership will provide a solution is one of the biggest risks facing a company that needs to use foreign exchange.
Businesses that don't hedge, will not give themselves price certainty on the goods or services that they're buying or selling. This means that an adverse movement in the FX market could cause reduced profit margins, or even to lose money altogether on contracts that they've undertaken.
Q3. Can an SME adopt a strategy to save money in the same away that a larger business can?
A3. Yes - that is our expertise - we step in where a business has to deliver a robust treasury and risk process but may not have employees with the experience and expertise.
We work with established treasury functions and lean finance teams to build practical and workable solutions to most problems, so it is up to us to the find the closest thing to it – realising that the best solution may not fit within that business and working around the challenges that face us.
Q4. What sort of analytics and factors do you consider when planning an FX strategy for an SME.
A4. The first step is to assess the reliability of the data we'll be modelling from. Poorly thought out sales forecasts are often where companies come unstuck, with either under or over hedging versus their actual requirements.
We'll look at the stability of the supply chain and ensure that if we're dealing with unknown reliability that we can factor in some contingency should things not go to plan.
Organisations may have an existing hedging policy in place. We would back test this to understand its efficacy, and then we can either leave it, tweak it, or re-write from the ground up!
Understanding a client's attitude to risk is key and then understanding whether the margin in their products, or the profitability of their business can sustain that approach to risk.
Lastly, we'll consider the market and their view on what direction they see it trading in. We're generally averse to building this into any strategy, but if their approach to risk, margins and forecasting are robust enough, we can build this in to the framework.
Q5. Give examples of solutions/tips that would advise to businesses for FX planning around these scenarios going forward:
A5. Here are our tips for several key scenarios:
(a) An SME importing to the EU after Brexit:
- Build your inventory ahead of the 31st December 2020. The Government isn't ruling out border delays, and not having stock when a sale can be made will be uncomfortable.
- Review your FX policy and approach. Can it withstand a 10% fall in the value of the Pound? Do you have the cash available for margin calls if there were to be a 10% appreciation of the Pound? Do you have flexibility to delay or bring forward FX contracts to better manage your cashflows?
(b) An SME exporting to the US:
The dollar is going through a bit of a correction from the strength position it found itself in during the COVID lockdown. If this move were to continue, are your products or services still competitive with a materially weaker dollar? If not, think about hedging to a greater percentage of our forecasts where possible.
(c) An SME exporting/importing to China:
- Look at paying/receiving in local currency. The majority of trade with China is still settled in USD, despite local currency being a very viable option, which can lead to an easier overall process and better terms (our supplier doesn't then have to convert USD to RMB which costs them).
- You'll know by now how resilient your supply chain is and whether work needs to be done there, but China isn't as cost effective as it once was and lots of businesses are looking at emerging Asian markets to regain the cost savings that they were used to.
Q6. Finally what is your company's business ethic?
A6. Our business revolves around our clients and as such we deliver an exceptional experience for them, from start to finish. We want to be innovative and deliver them more value, but we are mindful that this shouldn't come at the cost of a less impressive service. Hamilton Court FX is one of the UK's leading providers of foreign exchange transactional advice and delivery. Our clients are across a range of sectors with turnovers between £5-500m, and we are regulated by the FCA.
"Going the extra mile is fundamental. We offer a non-stop service and work beyond traditional office hours, so if a business is closing a deal in Asia, meeting a reporting deadline in London or working late dealing with the US office, we are here."
About Hamilton Court FX
Hamilton Court FX is one of the UK's leading providers of foreign exchange transactional advice and delivery. With clients across a range of sectors with turnovers between £5-500m and is regulated by the FCA.