8 May 2017 10:30am

Why you must plan to deal with the effects of a fluctuating pound

SPONSORED FEATURE: Since the EU referendum, the pound has dropped by more than 10% against the euro and almost 20% against the dollar

Since the EU referendum, the pound has dropped by more than 10% against the euro and almost 20% against the dollar.

Such swings in currency can have a huge impact on businesses, particularly those in utilities, mining, construction and agriculture, because of higher costs and outgoings (firms that are most insulated from a weaker exchange rate, incidentally, are financial services and the creative industry, followed by education). So companies now have to think about whether to hedge against further volatility and how to spread any risk.

As hedges close, companies need to decide if they will pass on the cost of a weaker pound to consumers. Indeed, Mars recently warned that chocolate prices could rise after Brexit if the UK does not get a good trade deal with the EU when it formally leaves, something echoed by the Food and Drink Federation.

Aston Martin, the carmaker, reported pre-tax losses to have risen by 24% last year, partly due to the plummeting value of sterling after the referendum. Pre-tax profits were hit in part by the currency-hedging programme, set up before the depreciation in sterling.

For SMEs, currency volatility is just as stark. World First’s Global Trade Barometer recently found that SMEs that chose to remain unhedged will have felt the immediate effects of foreign exchange volatility and will have seen either import costs rise sharply, export markets become much more fruitful – or both. And many SMEs who held hedge positions prior to the EU referendum will be exposed to the weaker pound as contracts start to expire, which could push up costs for importers.

World First adds that while UK growth remains robust, many SMEs are worried about cost-push inflation.

“Those companies that did hedge their currency risk, via either forward contracts, options contracts or a combination of the two, will have protected their business from sterling’s weakness for a fixed period of time after the EU referendum,” World First Chief Economist Jeremy Cook said.

“However, as time passes, this market protection expires meaning more and more SMEs are now becoming exposed to the weaker pound, something many firms will be starting to feel the pain of. This feeds directly into import price-led inflation which reached 16.9% year-on-year in December 2016.”

But it’s not all doom and gloom. Some companies have benefitted from a weaker pound. Burberry saw sales in the UK surge by 40% in the last three months of 2016 as the slump in sterling incentivised overseas shoppers to flock to the UK to shop. Likewise, Imperial Brands, a tobacco company, reported a profit rise of 14% due to the pound’s weakness.

But ultimately, companies must have solid FX strategies in place to take advantage. If SMEs are unsure whether the current market rate could improve, it is possible to stagger trades so that if rates improve you can lift the average rate at which your lump sum was traded. Meanwhile, companies need to be ready to use forward contracts, utilise firm orders or exchange sterling at spot price.