22: Brexit and the concept of not so marginal gains
By © Cotio Consulting Limited, 2016
There has been a mass of analysis produced since the result of the UK’s EU referendum. But despite this swathe of literature, nobody really knows what the outcome will finally be for the country’s economy from the apparent decision to leave the EU.
In the short term, the UK economy has held up better than many expected. But longer term the outlook is far from certain. Businesses (and individuals) will have to face up to many challenges, including potentially drastic changes to their current trading agreements, possible relocation of offices overseas and of course fluctuating exchange rates; staying informed, managing costs and seizing opportunities have never been so important.
One obvious impact from the Brexit vote has been a significant weakening of the pound against most other currencies. After initially rallying to 1.5000, GBPUSD plunged to a low around 1.3225 as it emerged that the UK had voted to leave the EU. This was one of the largest one-day falls by a so-called major currency in history. Despite a few recovery bounces, sterling has remained weak against most currencies ever since. It is now down around 13% against the dollar and euro, and even more against the Japanese yen.
In theory, this has made the UK’s exports more competitive, while making imports more expensive. Regardless of whether or not you have received a windfall because of the foreign exchange (FX) moves, companies and individuals with currency exposure should examine how they manage their exposures.
The concept of marginal gains has received a fair amount of publicity due to the recent success of British cyclists. The idea is simple – if you can make small gains in many areas, they potentially add up to something far greater. And FX is one area where many companies can make what potentially could be significant gains.
This is not about whether a hedge is put on at the top of a bottom of a market, but about whether or not a competitive FX service is being provided. Numerous strategies can be used to manage and try to mitigate FX risk, from the simple to highly complex. But the core principle should remain simple – and that is to deal on competitive rates.
Unfortunately, many companies and individuals are not doing that. FX is full of contradictions and it is often billed as being commission free. However, the reality is that there is often a hidden cost of converting one currency into another – this is the ‘implicit’ cost of FX.
The rate many companies and individuals deal on can be very different from the ‘real’ market rate. I experienced this first hand a few years ago when I wanted to convert the proceeds of a house sale in France back into pounds.
When I asked my bank manager how much he was going to charge me, he confidently told me there was no fee. When I then asked what rate he was going to give me, I pointed out that he was in fact charging me £10,000. This equated to 3% of the amount I was transferring. Naturally, I went elsewhere – basically Austria for a Christmas skiing holiday, paid for by the money I ‘saved’.
Some SMEs are still being charged 3% or more when they carry out FX transactions. This is scandalous and it doesn’t have to be the case; better rates are nearly always available regardless of the amount that is being converted, and Cotio Consulting can help you access these if you don’t know how to.
Even if you are ‘only’ paying away 1%, reduce this to 50 basis points and the savings can still be significant. For a company that has £10 million of FX to do a year, this ‘marginal gain’ could be around $50,000 (£38,500).
According to Deloitte, 58% of chief financial officers have said they will lower their capital spending plans over the next three years because of the Brexit uncertainty. The potential for ‘not so marginal gains’ from efficient FX management might be something that might just change their minds.
7 October 2016