“Investors just don’t like risks ”
As a modern businessman I need to keep an eye on social media these days. Twitter, LinkedIn, news sites, you name it. What is interesting to see on social media is the amount of ‘what if’ scenario’s developed in relation to Brexit. From recession to boom, from bilateral trade agreement to Norwegian or Swiss model. One thing all these people have in common is that it’s too early days. People just don’t know jet. Every assessment they make is based on assumptions and possible outcomes. As most of you probably will have read all the different angles, I’ll try to stay with the facts.
A colleague of my once said: “investors just don’t like risks”. I think this is a great one-liner and captures what Brexit is all about in capital/ investor markets. As a result of the Brexit vote there is uncertainty in the markets which triggers multiple risks and they respond. Most tangible is the volatility we see in the currency and equity market. Sterling, euro and equity lower, US dollar and government bonds higher. Probably the markets will stabilize a bit but we’ll see more volatility as long as the uncertainty remains.
Another uncertainty for a lot of UK based multinationals is the European pass porting rule they now use to sell their products and services across Europe. I think it’s in everyone interest to negotiate good terms and conditions between the UK and Europe and this will take time. The longer it takes, the longer the uncertainty remains and consequently the more volatility we will see.
It’s going to take time to have all the necessary agreements with countries in place. Ultimately the outcome will be determined by political willingness of the involved countries and necessity to protect the economy. Questions is if a UK based companies using the European union passporting arrangement can afford to wait for the final outcome of these negotiations. Setting up a new legal entity outside the UK to mitigate the passporting and underlying treasury risk seems a sensible approach. Especially if we offset this against a window of two to three years to complete all negations. Countries like the Netherlands or Germany are still part of the European union and provide a stable financial and regulatory consistent environment. Of course there is more to it than just setting up a legal entity. These are strategic important decisions and must be taken with the utmost consideration.
The most important question to be answered is how do I, as a business with interests in the UK or Europe, manage the risks in the best possible way. The first step, is to assess what your immediate exposure is and if you have an hedging policy assure if the applied instruments mitigated the risks. If they did than it’s been an effective hedging policy. Market conditions constantly change so keep validating the hedging policy and instruments. This will make sure it stays fit for its purpose.
For those who don’t have a hedging strategy the past few days have been interesting days. The starting point I advise is that you need to focus on your core business as an entrepreneur and never peculate with future profits. Do not wait for more favorable market conditions to hedge your exposure. This is of course just my professional opinion. I’ve met multiple corporates over the years who consciously decided to not mitigate currency exposure as they see it as a zero sum game. In a relatively stable market I think it’s a fair argument. In a volatile market we see now I would argue it’s speculating.
Managing treasury risk is a combination of short, mid and long term decisions which rely on a certain regulatory stability. Intercompany lending, cash pool structures etc. are all based on a consistent legal framework to operate in. A standalone UK scenario creates uncertainty and will trigger risk and risk mitigating decisions.