Hedging Your Bets – Are We Prepared For More Surprises?

INVESTEC IRELAND‘s Head of Treasury, AISLING DODGSON, talks about CURRENCY FLUCTUATIONS for 2017 after last year’s string of surprises …

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Peter Drucker once said that “trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window”. The folly of forecasting was laid bare by last year’s wins for the pro-Brexit side in the UK referendum and Donald Trump in the US presidential election. Both the opinion polls and betting odds had suggested different outcomes in the run-up to those events.

Our base case is that the global economy will grow by 3.6 per cent this year – effectively, the same as the average annual pace of growth since 1980. So, are we in a “Goldilocks” environment, where economic expansion is not too hot or not too cold?

Of course a forecast is only as good as the assumptions underpinning it. The main risk to the Goldilocks narrative is that 2017 has no shortage of political events that could muddy the outlook. Major elections are due to be held in France, Netherlands and Germany. Across the pond, it remains to be seen how much of the Trump rhetoric will translate into policy reality. Closer to home, the UK is scheduled to trigger Article 50 – the start of the process where the British government will negotiate the terms of its intended divorce from the EU.

After last year’s surprises, we think people will be more nervous than usual in the run-up to each of 2017’s major events. This implies more volatility for exchange rates and commodity prices. One positive aspect of currency fluctuation, specifically movement in the dollar, is the growing tourism numbers. Another positive will be for Irish consumers buying European fashion: stock will be cheaper for retailers. The downside of fluctuating currencies may be felt, however, by the food and drinks industry where exports were eight per cent down in 2016 with weaker sterling contributing additional competitive pressures. This is likely to continue this year as the impact of Brexit continues. So, no matter what industry you are in, currency fluctuations will be a risk. By working with the experts, you can manage that risk.

Investec’s Tips for SME’s:

  • Buy or sell only in euros
  • Find natural hedges in your business
  • Insure your business against adverse movements through hedging

Aisling Dodgson is Head of Treasury at Investec Ireland.

This article appeared in a previous issue, for more features like this don’t miss our next issue, out Saturday, March 4.

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