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Pound's swings complicate life for small UK firms before EU vote

Monday, March 14, 2016 - 09:05

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Many British companies are struggling to find a strategy for how to deal with a possible "Brexit" from the EU.

[LONDON] Tom Phipps drew up this year's business plan long before Prime Minister David Cameron called a referendum on Britain's membership of the European Union last month.

The announcement came as no surprise to Mr Phipps, a purchaser for Universal Tyres, a medium-sized firm on the western outskirts of London. Even the June 23 date had been widely expected.

But he had not factored in the sharp swings in the value of the pound that followed the decision, or the currency's nine per cent slide against the US dollar since early December, largely on concerns that Britain might vote to leave the EU.

Mr Phipps said the actual amount he pays for the tyres he buys at dollar prices has risen by about six per cent from rates above US$1.50 which he had expected to pay in December. The rate is now around US$1.42.

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"No one had anticipated this kind of move, definitely not us," Mr Phipps, 40, told Reuters from the company's base on an industrial estate in Hayes. "I'm sitting back and praying that the pound climbs back above US$1.40 and keeps going. I still have a few weeks to go before I need to buy dollars to pay for products bought abroad and I am hoping that this doesn't get any worse."

Many British companies are struggling to find a strategy for how to deal with a possible "Brexit" from the EU. For small and medium-sized firms, like Phipps', the uncertainty of the run-up to the vote is a more immediate concern.

Mr Cameron promised a referendum on Britain's membership of the EU as far back as 2013, saying it was time to resolve differences over the issue that has long divided the nation and his ruling Conservative Party.

He says Britain's interests are best served by staying in the 28-nation bloc and leaving would be a "leap in the dark". The "out" campaign says Britain would be better off financially outside the EU.

That view is challenged by economists who say a Brexit would be a huge headache for thousands of British firms.

Economists at banks including Citi, HSBC, Goldman Sachs and Deutsche Bank have said it could cause sterling to lose about a fifth of its value, forcing many to rethink their businesses.

Currency traders UBS have forecast the pound could also weaken to parity with the euro. It is now around 1.29 euros.

Even a short-term swing in an exchange rate can be the difference between profit and loss for small or medium-sized firms in an era of disinflation and sluggish demand, with many burdened by debts from the 2008-09 financial crisis. "From a business point of view, the instability in currency that the Brexit process will cause for the next four months is frustrating," Mr Phipps said. "I must stress how uninformed I still feel of the real consequences for the UK and businesses like us should we leave."

TO HEDGE, OR NOT TO HEDGE?

Some companies have tried to protect themselves by hedging - making investments that offset the risk posed by currency movements - against both the fallout of an "Out" vote and the volatility in sterling that the campaign will generate.

Currency options - contracts where the holder pays a small percentage for a guarantee of exchanging in future at a rate set today - have risen since early December.

The focus initially was chiefly on six- and seven-month contracts but prices have now also risen on longer-term contracts, suggesting firms are covering themselves for more falls in sterling later in the year.

Some firms have also agreed forward contracts, another means of hedging under which two parties agree to buy or sell an asset at a specified price on a future date.

But such hedging focuses mainly on large multi-national companies serviced most closely by banks.

Research by corporate banking consultancy East and Partners shows only 20-25 percent of British and French companies with an annual turnover of less than 20 million pounds use options or forward contracts to hedge their annual currency exposure.

Universal Tyres has a turnover of 14 million pounds annually and employs 45 staff, selling tyres and parts to about 600 customers, typically garages, dealerships and stations that conduct the annual MOT test to ensure cars are roadworthy.

Mr Phipps does generally try to hedge, usually on a rolling basis, governed by demand and cash flow. But he says he has not done so in the current situation because he was surprised by the size and speed of the Brexit debate's impact on sterling. "We transact regularly in the spot or the forward market. The last couple of years it has worked for us but I hadn't anticipated this kind of move," he said.

About 60 per cent of the products he buys come from China and are priced in dollars. About 15-20 per cent are bought from Europe, he said.

GETTING THE KNOWLEDGE

Banking sector researchers say small companies may be reluctant to hedge because of a lack of knowledge about the choices, costs and benefits available to them. "The truth is that the vast majority of small companies tend to have a relationship with their local bank manager," says Daniel Webber, chief executive of consumer currency consultancy FXCompared.com.

"He or she will typically be someone who is primarily concerned with day-to-day finance, overdrafts, business development loans, that sort of thing." Mr Webber said banks could do more to help provide smaller firms with more knowledge but "it will not happen overnight." Some big international lenders, such as Deutsche Bank and Citi, have already begun to create teams that provide companies with specialist currency advice, and mostly London-based consultancies have been doing so independently.

James Lockyer, development director at the Association of Corporate Treasurers and an adviser to companies on political risks, says such knowledge could be vital for firms seeking to protect themselves as "it gets tricky in the next few months".

Even with such specialist knowledge, smaller companies may still feel at the mercy of the politicians as the Brexit campaign heats up. "The swings in the currency whenever a politician says something are very difficult to hedge against," Mr Phipps said.

REUTERS

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