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As
global trade continues to grow irrespective of
geopolitical tensions, natural disasters and general
market volatility, business is increasingly looking
towards risk management, not just with regard to
physical products and services but also how they
manage their foreign exchange (FX) exposure. The
structural change this risk mitigation behaviour is
having, and the subsequent opportunity and risk this
presents for providers, cannot be taken in isolation
as business growth determines the extent and speed
with which these changes will occur.
When we
consider that the FX related portion of annual
revenue is increasing across all markets among
businesses with $1-100 million turnover, as reported
by East & Partners’ (East) Business FX programme, it
clearly highlights the outbound view among importers
and exporters and the importance placed on their
international customers and supply chains. It also,
by default, illustrates the increased levels of risk
that result from this proactive, international
strategy.
The
value attributed to international relationships is
highest in Asia, specifically Singapore, where FX
accounts for more than three quarters of revenue,
and over 90 percent among Lower Corporates ($20 -
100 million). In contrast to this is the US where FX
accounts for just 60 percent of revenue, although
this low figure is a result of smaller business
activity. Importantly for the US though, is that
they have the highest forecast growth which is
interesting given the US government’s current trade
war rhetoric and underlines the fact that most
businesses just gets on with life, especially as it
is smaller business driving this forward.
When we
look at behavioural changes in the way business
approaches its FX risk management it is clear that
all markets are engaging in a more proactive manner,
driving a structural change in the market where the
proportion of FX being managed by FX Options and
Forward Contracts is increasing. This is, in part,
helped by the improved access and ease of use of
these products combined with an increasingly
educated and sophisticated business decision making
process in its day to day operations.
Australian business leads the way in this regard,
hedging 63 percent of its FX, at the other end of
the scale, businesses in Hong Kong are managing just
under a quarter of their FX exposure. Nevertheless,
as stated in East’s recent Global Hedging report,
this low usage among Hong Kong businesses is a
significant opportunity for providers. Combined with
the highest forecast growth rate by market of 3.7
percent in the coming 12 months it is an ideal time
for providers with a footprint in Asia to act.
However,
the significance this has in regard to value is a
little more complex. Whilst Hong Kong business is
reporting the highest forecast growth in percentage
terms, it is US business who achieve the highest
growth in real terms. Both markets are forecasting
the same increase in their FX as a percentage of
revenue, but the US is forecasting a greater
increase in the proportion then hedged with the
value of Hong Kong growth coming in second.
This
also presents a risk for providers as a direct
result of how the shift towards risk management
solutions impacts the use of Spot FX. This is seen
among Lower Corporates in the UK where a tipping
point has been reached and the volume of Spot FX is
decreasing. |
