Weak sterling: an opening not to be missed

It’s often said that there is never a bad time for a business to start exporting. While this is certainly sentiment that few would argue with, it’s also fair to say that some times are probably better than others. And the present time in the UK is a case in point.

Go back over the last 12 months and against sterling the euro was at times hovering in the high €1.20s. They were rioting on the streets in Greece and some bookmakers were offering pretty short odds against the partial or complete break-up of the eurozone.

While things didn’t look exactly rosy in the UK, it was problems in the eurozone that were grabbing the headlines, and where the markets were focusing. As somebody who follows these things fairly closely, I distinctly remember a number of respected analysts suggesting that a euro-sterling price of €1.40 or even €1.50 could be on the not-too-distant horizon.

Slowly, subtly, things have changed in the past 12 months or so and the markets – temporarily at least – appear to have switched their attentions to sterling. Sterling has certainly experienced several bad days at the office of late, suffering several percentage-plus slips against the euro. As I write, the rate stands at €1.16/£1.

There are good reasons for this shift in sentiment. Ongoing concerns about the UK economy, which contracted by 0.3 per cent in the final quarter of 2012, have certainly not helped sterling’s cause. More recently, however, Moodys stripped the UK of its much coveted AAA rating, although, to be fair, the markets had pretty much priced in a downgrade before the eventual cut was announced. There are other things one can throw into the mix which suggest a bumpy road ahead for the UK. It is expected to be confirmed in next month’s Budget that the underlying 2012-13 deficit will be higher than the 2011-12 deficit – one can safely assume the upcoming Budget will be another sombre affair.

So what can export businesses read into all of this and how can they protect themselves – and benefit – moving forwards? Clearly, in the absence of virtually any positive economic data, sterling will continue to struggle in the short-term. And as a weak pound is generally helpful to exporters, many will be hoping to capitalise on sterling’s current blip.

A key point to make here, however, is that firms should not bank on a lower sterling persisting for the duration of the year – particularly against the euro. Even as I write, European stock markets and the euro have fallen amid concerns that the current deadlock in the Italian general election – where many voters don’t appear to want the Brussels-stamped austerity measures which will allegedly help save the euro – could place the focus back on the eurozone debt crisis. In September, we have the German general election and one might suggest we can expect more fun and games there.

Having a sensible currency strategy, then, is the first thing any business needs to do in order to take advantage of a weak sterling in these times of uncertainty. Large, global enterprises don’t take chances where currency movements are concerned – and neither should SMEs. That’s the reason why now is a good time to look at using forward contracts – if you aren’t already doing so – as a way to avoid the uncertainty associated with future rate movements while still benefiting from the relative cost competitiveness of your products brought about by sterling’s fall.

Forward contracts are a form of hedging which allow you to reserve today’s exchange rate for a set period until the time comes for an invoice to be settled. In the case of the relative decline we have seen in sterling of late, shrewd exporters will have been looking to ‘lock in’ the attractive rates we have seen, thereby ensuring that if sterling begins to rise against the euro or, more generally, there is more volatility due to unrest in the eurozone, they will be able to avoid any unwanted surprises when it comes to receiving future payments from eurozone customers.

It is possible to benefit from forward contracts in many ways – whether you have international invoices due to be settled in the next month or two or if you will be receiving payments from clients throughout the year. Forward contracts are a simple and hugely effective way to help businesses to budget and offer much greater stability than simply letting the markets decide. They can help enormously with financial forecasting.

While currency strategy is a fundamental part of any successful export strategy, there are several other reasons why international trade can have significant knock-on benefits for all aspects of your business.

A telling point to be made here is that, from the outset, the mere process of gearing up to trade abroad can be hugely beneficial to any business – offering an opportunity to fine-tune systems and processes, sharpen up marketing propositions and introduce your employees to the dynamic world of international trade. All other things being equal, gearing up to trade abroad is likely to make your business more competitive.

It is also worth considering that the UK has a genuinely world class range of support available to businesses trading overseas. UK Trade and Investment (UKTI), which provides excellent support for exporters, boasts around 2,400 staff and has a presence in 96 countries. UKTI can help in many areas – from providing market intelligence, to offering advice on business regulations and legal issues in target markets through to overseas trade missions. It can also offer a conduit to more specialist export advice, relevant seminars and networking opportunities.

Even without the help of UKTI, finding out about international target markets is far easier now than in days gone by. The internet means it is possible to carry out much of the ground and preparatory work on a target market before making an in-person visit. Moreover, constantly improving communications technology such as video conferencing and Skype mean it’s now possible to maintain healthy relationships with clients on the other side of the world without having to travel abroad constantly. Foreign clients can be well serviced from the UK for much of the year.

Finally, before commencing any exporting strategy, I would urge any business to think long and hard about the issue of treasury management. Treasury management is critical for the success of any business, and it is particularly important for companies involved in overseas trade markets, where risk levels may vary. Even experienced finance directors may struggle to fully grasp the types of financial products required to meet an organisation’s needs and, in terms of international trade, will often lack intimate knowledge in specialist areas such as international payments and credit insurance.

We’ve recently written an in-depth Treasury Management Report on these very issues for SMEs which can be downloaded at http://www.smartcurrencybusiness.com/businessmatterstm.htm