In April, the IMF predicted that global growth in 2020 will fall to -3%. This is a downgrade of 6.3 percentage points since January 2020. Huge swings are being seen across all markets, points out Lee McDarby, Managing Director, Corporate Foreign Exchange and International Payments at moneycorp. “The markets have been very whippy during this period, and as we entered lockdown, volatility was at its highest level since the 2008 financial crisis.”.
For FX context, McDarby notes that in March, sterling/dollar dipped as low as 1.149 – the lowest since 1985 – and has since recovered to around 1.25. Meanwhile, sterling/euro went as low as 1.0650, “the weakest we’ve seen the pound against a single currency since the financial crisis”.
Of course, these “huge swings” aren’t entirely due to the COVID-19 pandemic. As McDarby points out, there have been a number of political factors to contend with as well. The US-China trade war has escalated. President Trump’s continues his battle with the World Health Organisation (as of 8th July the Trump administration began formal withdrawal). And then “the small matter of Brexit” is still leaving many unknowns for people and companies alike.
Trade must go on
“Cash is king”, so the saying goes. McDarby says this is holding true even more so during this pandemic. “Whilst borders have closed and physical offices have been put into hibernation, trade still has to go on,” he says.
Indeed, adaptation has been key for treasurers and treasury functions, working remotely and taking advantage of the video conferencing platforms that so many have become familiar with over the past few months. And whilst global growth figures have slumped, McDarby notes that some businesses have performed better than expected, given everything they’ve been through and the various restrictions placed on them. Trade has been notably brisk for some businesses within tech and healthcare, with “a lot of things happening with PPE (personal protective equipment) right now, in the drive to protect frontline workers”.
Additionally, remote technology adoption has boomed, as have home entertainment businesses. Indeed, between 17th March – 30th April 2020, Netflix saw a 332% increase in streaming activity and about 16 million people created accounts in the first three months of the year – almost double the new sign-ups it saw in the final months of 2019. In line with this increase in users, the share price of the company has risen by around 70% since January this year.
On the other hand, says McDarby, businesses that rely on the movement of people – such as property, travel, automotive, traditional retail – have all struggled badly during the lockdowns. He’s hopeful though that as lockdowns begin to ease, those businesses will get a boost.
“We have a close relationship with the British Chamber of Commerce, and some of the data we’ve seen has been amazing,” he says. Most notably, he has seen clients change supply chains “at the drop of a hat”: clients have switched to trading in different currencies because they moved to alternative geographies to try and flex their supply chains; and importers have become exporters because the weakness of certain currencies has allowed them to take advantage of gains, developing goods they can sell.
Navigating the new risk landscape
With the global understanding that the fallout from the COVID-19 pandemic is unprecedented, it’s also becoming clear that risk management will unlikely be the same once it’s over. McDarby explains: “The risk registers of most treasurers are going to look very different right now compared to 2019, because even if they had a global pandemic mapped out, it would be difficult to imagine anything like this”.
However, businesses that have survived and “weathered the storm” are likely to benefit in the future from the strength they’ve found. To assist with this, McDarby says that all treasury policies should from now on be constantly reviewed, as all are of significance right now. A special focus should be on treasury risk management policies though, as it’s these that help the business put best practice in place for dealing with “curveballs”, and ensuring the company has sufficient liquidity.
An example of how to deal with curveballs, he says, is current stress-testing practice at moneycorp. “Whenever we’re looking at some of our more structured products, we always go through a suitability and appropriateness test with the client,” he explains. “We use a hypothetical example of a 10% swing in FX rates. In March alone we saw 11-12% moves.” With worst case hypothetical scenarios having become reality, it’s preparedness for such situations that he says treasurers need to have.
Predicting the future
There’s no way to predict what the future will hold for the markets. There is potential for future waves of COVID-19 and more lockdowns, as well as a further decline in the state of current geopolitical tensions. Nonetheless, McDarby hopes that the easing of lockdowns will help along the road to some economic recovery.
“There’s all sorts of shapes of recovery that people look at, but a glorious V-shaped one doesn’t feel like one that’s being forecast at the moment,” he says. In fact, the aviation industry has suggested a “swoop” recovery, predicting summer 2021 for flight activity to return to pre-COVID levels. “But even that feels a bit ambitious right now!”
McDarby does note that Bloomberg’s average forecasts see sterling strengthening in 2021, under the hope of some Brexit certainty, with sterling/dollar looking to settle around 1.32. Likewise, sterling/euro is being forecast for 2021 at 1.15. But he also notes that every forecast comes with the huge caveat that in the next six to 12 months curveballs could come from anywhere. “We’re not through the other side of this, so it’s definitely prudent to be on your toes and alert to what’s happening in the markets and what the impact on your business can be.”