The two sides of a coin
Moneycorp, 02 Jul 2009, David Kerns
A weaker pound has had a major impact on UK businesses, as Finance Directors have struggled to manage currency exposure. For importers cost pressures have heightened, but for exporters opportunities to profit have been plentiful.
Independent research commissioned by Moneycorp revealed two fifths (42%) of Finance Directors said that sterling’s vulnerability had a significant or serious impact on their business, while overall 92% claimed that it had impacted their business in some way.
Importers
Recent sterling weakness has hit importers hard. For 30% of UK businesses, imports represent over a quarter of their costs; costs which Finance Directors are struggling to control.
The research unearthed a worrying lack of confidence in sterling. Finance Directors are unconvinced about a recovery in the pound’s value, given the rollercoaster ride it has endured compared to most major currencies in the first half of 2009. Only 43% of Finance Directors are confident that sterling will recover to any great extent in the next six months.
Mark Deans, Corporate Dealing Manager at Moneycorp said: “The drastic fall in the value of sterling against most major currencies has been a hefty blow for British importers. While some people cite green shoots, this research reveals that Finance Directors across the UK are more pessimistic; they are not banking on the pound’s recovery over the coming year.”
Worryingly, those responsible for managing overseas trading within businesses appear to have insufficient knowledge of how currency fluctuations can affect profits. A third (30%) of Finance Directors acknowledged that a lack of understanding of currency risk had had a negative impact on the bottom line, and over a quarter (26%) of those were large businesses, trading an average of £2.7 million a year.
Compounding the effect that a weakening pound has had on British importers is the fact that 40% of large companies surveyed do not actively protect their exposure to currency risk – even though their costs and revenues are heavily influenced by imports. That said, it seems that businesses would like to reverse this trend, with three quarters of respondents (71%) saying they would like to be more informed when considering their currency exposure.
Exporters
For British exporters, sterling weakness has provided many opportunities for growth. But with 45% of British companies not actively managing their currency exposure, the risk of missing out on current market advantages is high.
The government is looking for an export-led recovery to the UK recession. If low confidence in the pound (expressed by 57% of those questioned) is founded, then exporters can continue to enjoy the opportunities presented by export markets across the world.
The high proportion of companies (45%) who do not protect these opportunities by actively managing their currency exposure could still face turbulent times. Recent movements (which saw the pound surge 11% against the dollar in one month) highlight how quickly the markets can move and how exporters need to hedge in order to retain the advantages recent conditions have provided.
Mark Deans adds, “Whether your business is in importing or exporting, the pound’s recent strengthening has highlighted the importance of putting a strategy in place to protect against market volatility. The recent upturn in sterling was unexpected by many Finance Directors and, as a result, companies have been slow to react to the recent highs of sterling against both the euro and dollar. There are strategies available to help protect against, and to take advantage of, sterling movement.
“When trading overseas, the priority for businesses of all sizes should be to protect against currency risk – and it needs to be managed as effectively as possible. As a nation heavily reliant on imports and exports, you ignore market volatility at your own risk.”
For expert guidance on the foreign exchange markets, companies should contact Moneycorp on +44 (0)20 7823 7400.