FSG has long cautioned multinational corporations (MNCs) about the effects of a strong dollar and low oil prices, not just on global economic conditions, but also on their businesses. We have worked extensively with clients as currency volatility moved far beyond the corporate treasury into business operations and pricing strategies. The latest round of financial reporting from US and European MNCs shows that the impact of currency volatility on their businesses has not abated, rather, it was the worst yet.
Corporations have seen five consecutive quarters in which the negative impact of currency volatility was magnitudes above the running average of previous years. By comparison, the height of the euro crisis saw two quarters of negative currency impact, returning quickly to prior levels.
However, influenced by a few weeks of relative calm, many executives are beginning to look past this era of volatility and back to “business as usual.” While FSG does not anticipate that 2016 will bring the same magnitude of currency depreciation in emerging markets, the storm is not yet over. Companies should continue to arm their businesses against the impacts of currency, interest rate, and input price volatility, all of which are likely here to stay.
In fact, we can find a case study of similar impact from just 12 months ago. From March to May of 2015, financial markets participants convinced themselves that the Fed was unlikely to raise interest rates in 2015 after all. The dollar’s strength eased up somewhat, as did oil prices. Later in the summer, even as China’s stock market crashed, financial markets participants tuned back into the Fed, and two quarters of immense currency volatility losses for corporates ensued.
FSG analysts do not agree with current financial markets’ expectations for no interest rate hikes in 2016. Job figures are growing at a robust rate, and inflation is strong – particularly when stripped of the impact of lower oil prices. In fact, FSG sees economic conditions signaling June 15 as a likely date to raise interest rates. If cautioned by the potential global economic risk of “Brexit” on June 23, the July meeting is an obvious substitute. At this moment, surprise to financial markets participants will mark another surge in depreciation of emerging markets currencies against the US dollar, resulting in losses for corporates.
Implications for action:
While financial markets move quickly, global businesses often cannot. FSG strongly recommends that regional executives take currency seriously. As financial markets become more interlinked and companies expand their operations to new countries, the risk of losses due to currency fluctuation are more likely. Currency translation is not only an issue for the corporate treasury; it is an operational issue as well, and it will affect your ability to hit your targets.
- Be wary of sudden changes: As we saw in 2015 with Switzerland’s surprise de-pegging of the franc, currency policies can change overnight. Monitor where the gap between official and unofficial exchange rates are widening, and where local companies or governments have substantial US dollar-denominated debt. We also recommend identifying commodity-exporting countries with pegged exchange rates, and where new currency policies could be popular among local groups. These countries will be the most at risk for a rapid change in currency policy, which would in turn disrupt local business plans.
- Re-examine your product positioning, including price: Rapidly changing exchange rates make imported products more expensive. FSG’s clients are experiencing changes in customer preferences toward cheaper, localized products. As a result, your competitive position and market share can shift without any change to your product price or packaging. Re-examine your customer segmentation and product positioning to understand where you may have pricing power, or where marketing campaigns may be value-additive in maintaining or even gaining market share.
- Extend payment terms: In previous years, currency volatility has caused executives to tighten payment terms, ensuring that they receive as much revenue as they can upfront. However, slowing global economic growth and depreciating local currencies mean that many partners and customers are struggling to make ends meet. Now is the time to work with your local team and consider extending payment terms.
- Go local: Particularly for companies reporting in US dollars, local assets have become cheaper. Where joint venture, merger, or acquisition is an effective corporate strategy, it is time to localize production.
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