News & Resources

Blog

Latest Insights
Press Releases
Latest Insights

Why It’s Time To Stop Making FX The Corporate Earnings Scapegoat

by PYMNTS.com | August 24, 2018

Consider it the new normal. Consider it a rollercoaster ride. Consider it a reason to drink, down antacids or aspirin, or crawl under the covers and imagine white sandy beaches with easy ocean waves.

Whatever the case, the global economy is in a state of volatility, and signs indicate it won’t end anytime soon. That means retailers and other companies need to up their risk management and hedging games — and do so before one crisis or another (a currency collapse in Turkey one week, who knows what next?) puts corporate treasurers and CEOs into a panic, threatening companies’ profits, jobs, growth and survival.

In an interview with PYMNTS’ Karen Webster, COO Mark Frey of Cambridge Global Payments talked about the current state of risk management among businesses that operate in the commerce and payments world, and what’s coming next.

To be fair, Frey’s tone did not indicate that the sky is falling as the above paragraphs, but his point was as serious: Prepare well for this new world of volatility, where politics, tariffs, trade wars, rising interest rates and other factors are creating constant chaos, and where the relative stability of yesterday already seems like a distant memory.

Positive Disguises

The second quarter earnings season brought some positive surprises for investors, with companies such as Procter & Gamble, MastercardVisa and Walmart beating analyst expectations on revenue and earnings. However, positive growth can disguise looming threats. Volatility promises to increase and, soon enough, that will be “felt on income statements” and impact earnings, Frey told Webster. “These long-term trends can derail a business irrespective [of] how they are performing in the local currency.”

Granted, many companies already do a rough form of hedging by locating, say, manufacturing and other cost centers in certain countries, “but it’s not really efficient,” he said. “You are creating a whole infrastructure, rather than creating a financial hedge.”

Besides that, too many corporate executives use currency swings and their ill effects as an excuse, on par with bad weather or acts of God. “Some CEOs just throw their hands up in the air and say ‘there is nothing we can do about it,’” Frey added, “but there is.”

The general remedy? A long-term and proactive look from the point of view of the financial hedging and risk managementopportunities. “Having a policy in place, and identifying risk that is material to the firm, takes some of that guesswork out of the equations,” said Frey. “It gives you insulation from exposure.”

Turkish Crash

Take the example of Turkey. Its lira has all but crashed and burned recently, amid a political rift involving the United States and its NATO ally. What’s good for U.S. tourists there is bad for exporters to that country, “even if that’s just 10 percent of your business,” Frey said. “All of a sudden, you had a material devaluation. These types of things can happen whenever you are working outside of your domestic jurisdiction.”

Turkey is only one crisis: “We will see more situations like what has transpired in Turkey and Venezuela,” he said.

A crisis always results in “911” emergency calls to firms like Cambridge Global. In fact, such a crisis is what usually leads to a company finally adopting a solid risk management and hedging plan. It also usually inspires top corporate executives to get beyond philosophical talk about crafting such a plan, to come up with solid numbers and a strategy that involves metrics, he said.

The benefits are real. He cited a Bank of Canada study, showing that corporates with such plans tend to have stronger returns on assets, less need for cash on hand and more ability to finance growth at lower costs.

Quantify Risk

Risk management goes beyond currency hedging. It involves figuring out, for instance, how exchange rates could ruin financial forecasts, and where an organization’s weak spots are by market, product category or other areas. “If you quantify the risk, then you can begin to determine where they are material enough for your firm,” he said.

Protecting against volatility might involve putting price adjustments into sales contracts, he said, but that just shifts risk to clients and adds another level of difficulty to the sales process. Smaller firms are much less likely to have the heft to do that than larger firms. Frey said, “In many cases, there are easier, simpler, customer-friendly ways to manage that risk yourself.”

In addition, he added, it always helps to look at industries that are very well practiced at hedging and risk management for lessons. Agriculture stands as one of those prime examples.

If and when the sky really does fall, those who have foreseen that crisis and made ample preparations will do much better than those who winged it. To put it another way: “It’s better to make a decision from a position of strength than weakness,” Frey said. “Too many firms don’t heed that advice.”

As Published on PYMNTS.com

“Cambridge Global Payments” is a trade name, which in this document refers specifically to one or more of these legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (Nevada), Cambridge Mercantile (Australia) Pty. Ltd.

Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice.

Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis.

This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.

Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge.

Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you. Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract.

FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance.

This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.

Fees may be earned by Cambridge (and its agents) in respect of any business transacted with Cambridge.

The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document.

© Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details.