Risk Mitigation
Posted on 08. May, 2010 by editor in Business News
JAMES DOUGLAS, senior manager at Lloyds TSB Corporate Markets in Nottingham considers why British businesses seem reluctant to mitigate financial markets risks.
Financial markets have been particularly volatile over the last few years, including wild moves in commodity prices and large interest rate cuts. Sterling has also experienced strong volatility, which can wreak havoc with the profitability of businesses involved in imports and exports.
Almost nine in ten British businesses say they have no hedging strategies in place despite increasing concerns about financial market risks and their potential negative impact, according to the Business Risk Report from Lloyds TSB Corporate Markets.
Now in its second issue, the report captured the views of 1,732 businesses across the UK and shows close to 90 percent lack any measures against financial market risks. Yet, despite this, 55 percent of companies are more concerned than six months ago about the impact of foreign exchanges movements, significant increase compared to 45 percent in the last survey. Nearly half, 49 percent, of companies said they were more aware of commodity price risks, up from 41 percent. As the inflation risks and interest rates volatility, the apprehension is stable at respectively 27 percent and 21 percent. However, companies’ adoption of hedging strategies designed to mitigate the impact of financial risks remained low. Only 12 percent had strategies to hedge FX risks, marginally more than the 11 percent of respondents in the previous survey. Other heading strategies’ popularity was slightly down, 10 percent for interest rate risk, vs 11 percent and seven percent for commodity prices, vs nine percent. Interestingly, only five percent of companies have hedging in place to deal with the negative impact of inflation compared
to seven percent previously.
Across industry sectors, companies in the wholesale sector are the most concerned about FX risk at 74 percent and consequently 26 percent have FX hedging strategies in place. Manufacturers are also better prepared with 22 percent of those companies engaged in FX hedging and 12 percent actively mitigating the impact of commodity prices.
At the regional level, the report highlights some large differences. For example, 63 percent of companies in South Wales are concerned about commodity prices while the figure is only 39 percent in the Thames Valley. In Scotland, 27 percent worry about interest rates compared to 18 percent in the South West.
In the Midlands, 58 percent of companies are worried about foreign exchange movement, this is up from 46 percent the previous survey and encouragingly 14 percent have adopted FX hedging strategies, which is higher than the national average. On the other hand, only 24 percent of Midlandsbased businesses expressed concerns about inflation, a UK-wide low. The figures are 19 percent and 50 percent for interest rate volatility and commodity prices respectively, similar to the UK average.
Another key finding from the survey is that business confidence levels are continuing to improve, albeit from the recent record lows. This is an important indicator as business confidence is often a good indicator of future economic growth. In fact, business confidence has risen from a record low of -32 to a two year high of 16, which suggests economic activity is expected to gain traction in the first half of 2010. However, business remains cautious as weak domestic demand could be a threat to their prospects.
Finally, the report highlights the views that almost two-thirds of companies expect interest rates to remain unchanged during the first half of the year down slightly from the last survey, while the proportion expecting an increase in rates rose to just over a third. What is interesting is that many companies are being proactive in managing their interest rate risk thereby ensuring their competitive position.
Concerns of financial risks have continued to increase, yet businesses seem reluctant to adopt hedging strategies. Nevertheless, in a world of increased global competition and wafer thin margins, engaging in hedging strategies designed to mitigate financial market risks can be the difference between success and failure, winning market share or losing customers to competitors, being profitable or lossmaking.
