Post-Brexit: taking strategic steps to manage FX risks

Transcription

1 Post-Brexit: taking strategic steps to manage FX risks May 2017 Page 0

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2017 Ernst & Young LLP. All Rights Reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 1

3 Brexit milestones looking ahead Negotiation Ratification Ratification Implementation Article 50 triggered on 29 March 2017 March 2018 one year into negotiation period New EU-UK deal expected to be signed by March 2019 New EU-UK deal expected to come in force TBD 30 March 2017: UK Government publishes White Paper on Great Repeal Bill 31 March 2017: European Council responds with draft negotiating guidelines for EU27 29 April 2017: European Council Summit to finalize guidelines for the EU negotiating position 7 May 2017: Final round of the French presidential election 24 Sep 2017: German federal election to elect members of the Bundestag October 2018: Michel Barnier, (European Commission Chief Negotiator) has indicated that the negotiation should be concluded by this point to allow for ratification by EU Council and Parliament Autumn 2018 Spring 2019: Period in which Nicola Sturgeon is seeking a second Scottish independence referendum UK Government: Proposing variable implementation periods for different sectors depending on the time it may take to adjust, in order to avoid a cliff-edge for business or a threat to stability as new arrangements are adopted May 2019: European Parliament elections without the UK Page 2

4 Key areas expected to be impacted Immediate term: Dealing with volatility Treasury Transfer pricing Reassuring people Trade Treasury and finance Key functional areas People Headquarters Short to medium term: Key functional areas Systems changes Supply chain Ongoing tax changes Future reform Page 3

5 What we learned from survey respondents 56% foreign investors Instability #1 risk 1 Fifty-six percent of foreign investors surveyed plan to invest in Europe in the next three years, a remarkable sign of investor optimism despite an uncertain political and business climate. Source: European attractiveness survey: plan B for Brexit, EY, January European instability is the boardroom s number one cause for risk: Global economic volatility (highlighted by 37% of our respondents) and the fragmentation of Europe (32%) are the biggest worries for the continent s investors. Page 4

6 What we learned from survey respondents International companies Brexit #3 concern 86% 14% 3 Brexit is third on the list of concerns, but it s a much bigger worry for foreign companies established in the UK (33%) than for those that are not (15%). For those not established in the UK, geopolitical and wider EU instability and the slowdown in trade flows are more urgent concerns. Relocation 4 may happen: 86% of international companies active in the UK say they plan to stay; 14% will transfer some or all of their activities elsewhere. The UK s attractiveness will be affected by Brexit, but its competitive advantages remain strong and may strengthen somewhat if the government improves incentives in key areas. Yet, we expect an uptick in relocations Europe-wide, driven by diverse deep trends, including changes in technology and corporate competition. Source: European attractiveness survey: plan B for Brexit, EY, January 2017 Page 5

7 What we learned from survey respondents Main alternative destinations 1 Germany Referendum France Ireland Netherlands 5 The lines of Europe s foreign direct investment map are starting to shift: Germany is the UK s main challenger for the top spot, while France, Ireland and the Netherlands are more distant competitors. But it is not just a competition between countries: European cities are increasingly competing to attract cross-border investments. Source: European attractiveness survey: plan B for Brexit, EY, January Seventy-one 71% of foreign investors felt an impact percent of foreign investors surveyed have already felt some impact of the EU referendum results across their European operations on at least one area of their business, most commonly on operating margins, cost of purchases or sales. Page 6

8 What we learned from our survey respondents Sensitive sectors Brexit Financial services High technology Medium-sized companies 4% of senior executives 7 The referendum and its potential consequences have a knock-on effect on companies, especially in three business areas that are likely to be vital to the economic future of Europe and of the UK: financial services, high technology and medium-sized companies. 8 Just 4% of senior executives surveyed said they were wellprepared for Brexit, and 1 in 10 companies has no plan at the moment. Source: European attractiveness survey: plan B for Brexit, EY, January 2017 Page 7

9 What we learned from survey respondents Volatile environment Locations Finance and innovation gaps Supply chain Foreign investors Growth Protectionism Talent 9 If the UK leaves the European single market, foreign investors may need to focus on the short-term consequences for their supply chains and growth perspectives. 10 Our research suggests that companies and governments in Europe may need to manage their future in an increasingly volatile environment, prepare for creeping protectionism, redesign their location strategies in Europe, tackle the talent conundrum, and bridge the finance and innovation gaps. Source: European attractiveness survey: plan B for Brexit, EY, January 2017 Page 8

10 Comments from business after Brexit Boeing is committed to the UK Government's prosperity agenda and we share the goals of enhanced economic growth that the prime minister has set. Boeing has doubled its presence in the UK over the past five years, and we don't really see our plans changing. (Boeing's Chairman Dennis Muilenburg). EasyJet indicated that it may shift some functions from the UK for regulatory reasons but has no plans to shift its headquarters. Vodafone announced it could move its headquarters from the UK depending on the outcome of the negotiations to leave the EU. The chairman of HSBC Douglas Flint said it is NOT moving its headquarters from the UK. We re here to stay. The UK matters with or without being a member of the EU. The Brexit vote will not diminish our commitment to your country. Siemens will not leave the next generation behind.(siemens Chief Executive Joe Kaeser) JP Morgan is considering moving hundreds of jobs out of the UK due to Brexit. It is considering shifting staff to Dublin, Frankfurt and Luxembourg once the outcome of talks with the EU is known. Page 9

11 GBP pre- and post-brexit vote, June 23, 2016 USD per 1 GBP July 1, 2015 April 30, Brexit vote Article Source: Bank of England: Page 10

12 GBP historical volatility USD per 1 GBP January 1980 April Global financial crisis G7 USD appreciation European Monetary System crisis 9/11 and dotcom bubble burst Threat of sovereign debt crisis Spain and Italy Onset of Greek financial crisis Brexit vote Source: Bank of England: Page 11

13 Historical pound plunge In the early 1980s, the pound lost 50% of its value before recovering. In 1992, it plunged against the deutsche mark when Britain left the European Monetary System. The pound plunged 30% during the Global financial crisis. The pound fell 17% against the dollar since the vote of Brexit June 23, This ancient history demonstrates that we can expect a pound crisis at least once a decade. Depreciation of the pound has been followed by recovery; but volatility has been the one constant. Page 12

14 Brexit rhetoric and pound volatility continues Sterling Remains Under Pressure as Brexit Talks Continue (DailyFX, February 7, 2017) British Pound Remains Stable As The Brexit Process Is Official (Benzinga, March 29, 2017) GBP Points South After Weak UK Data And Widening Trade Deficit (DailyFX, April 7, 2017) GBP/USD Weakens Then Rallies After Latest Bank of England Credit Survey (DailyFX, April 13, 2017) GBP Remains Strong Despite Negative Brexit Rhetoric (DailyFX, May 2, 2017) Page 13

15 Immediate impact of a weak pound Pound sterling fell 17% against the dollar since June 23, 2016 Favorably impacted UK manufacturers and exporters UK firms with foreign profits Foreign investors looking to purchase UK assets UK s trade deficit to be reduced UK citizens paid in USD Unfavorably impacted Foreign firms exporting to UK UK manufacturers relying on imported raw materials British consumers buying imported goods Reduction in capital flow due to uncertainty UK expats paid in GBP Page 14

16 Who was impacted favorably or unfavorably Favorably impacted (cost base in UK and primary earnings overseas) Unfavorably impacted (primary earnings in UK with foreign cost base) BAE Systems, UK defense contractor Bombardier, Canadian train and plane manufacturer Rolls Royce, auto manufacturer Glencore, mining company Diageo, alcohol beverage company BP, energy company Burberry, luxury goods company UK tourism industry, bed and breakfast EasyJet, UK-based airline Ryanair, Ireland-based airline Deutsche Bahn AG, UK rail operator based in Germany Adidas, clothing and shoes company Ferrovial, Spanish infrastructure construction company Page 15

17 Low GBP impact on US manufacturing companies US companies with pound- and euro-based manufacturing businesses will experience translation losses. Companies with sales in these currencies will see declining revenue once translated into dollars. Many US manufacturers have significant operations and costs in Europe, so they may see a cost benefit of the declining currencies, but likely not enough to offset revenue declines. Europe is US manufacturers second-largest trading partner. Increased uncertainty and a lower euro or pound will likely decrease US export revenues. In addition, if economies slow in the UK and Europe, that will decrease export shipments for US companies. Page 16

18 Low GBP impact on energy The UK is a net importer of electricity and gas, meaning it now faces higher energy costs arising from a weaker pound. The impact on the gas trade is muted due to access to global liquefied natural gas markets and gas storage. In the event of an oil and gas crisis, the UK may also be excluded from future agreements on supply security such as EU solidarity principles. Page 17

19 Low GBP impact on consumer products and retail There will likely be increased exposure to currency, commodity and finished goods fluctuations, which will affect balance sheet, sales, margin and operations costs of consumer products and retail companies. Prices of fresh produce will likely increase in the midterm for UK consumers as much of this is sourced from the EU. Page 18

20 Understanding your exposure key questions to ask yourself What are your inputs and outputs of trade flows? Where is your production, and where is your market? Are you committed to a price to end customers? In what currency are your inputs/raw materials denominated? What is your pricing ability, and what currency agreements are in place? Do your contracts allow rate renegotiation during high volatility? Can underlying exchange rates be passed to the end user? Are you currently hedged, and are your competitors hedged? Page 19

21 Assessing your current state risk management capabilities Is your company clearly aligned between the board, management and the treasury organization? Do you have effective foreign exchange (FX) risk management policies in place? Are there accounting policies around billing and collection currency for intercompany and third parties? Do you have a risk committee that includes operations, finance, and supply chain? Does the company plan include currency prices? Is there effective communication between the business units and treasury centers as exposures change with business conditions? Is there an effective FX exposure tracking mechanism? Is your organization using appropriate treasury technologies? Does your company have trained people with the skillset to implement, execute and report a hedge program? Page 20

22 Making effective decisions during periods of volatility After volatility occurs in the market, it is often difficult to assess risks and make effective decisions that benefit your organization. The right risk management model will be different for every company, based on its industry, capital structure and geographic footprint. Below are fundamental steps to take to manage risk during times of volatility. Business exposure identification Risk and impact analysis Policy, procedure and control development Risk system evaluation Develop risk mitigation strategy Governance Tax and accounting review Page 21

23 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com