When Economies Sour, The Hedgers Stand Tall

Silver linings. Blessings in disguise. Opportunities are knocking.

Pick a favorite cliché — it’s OK — and feel free to apply it to this current phase of global economic volatility. Despite all the negative news, despite all the political and trade tensions, despite all the currency declines, there are reasons for optimism for merchants, wholesalers, manufacturers and other businesses.

That said, optimism without a firm plan in place is just another form of hot air.

A new PYMNTS discussion between Karen Webster and Karl Schamotta, chief market strategist at Cambridge Global Payments, functioned as a mostly bright view of the benefits that can be gained by businesses as much of the world — justified or not — moves further into the-sky-is-falling mentality. The conversation also underscored the growing important of currency hedging, foreign exchange and risk management for businesses of all types.

So, what is the state of the global economy these days? What are the signals saying when it comes to such areas as trade, currency risk and emerging market stability?

Two Types Of Normal

“It’s sort of the new normal and the old normal at the same time,” Schamotta told Webster. That’s because things are shaping up as a reflection of, say, the currency and emerging market crises of the 1990s with the fledgling trade wars and political shifts of the early 21st century.

What is clear is that the sense of stability that seemed to finally come after the 2008 financial crisis and resulting global recession is apparently at an end. Indeed, the world’s major central banks are stepping back after propping up markets and assets, he pointed out. “As central banks are stepping back, you are seeing some of that volatility in currency behavior reemerging,” he said.

The news brings new problems nearly every day, either short-term or longer. Turkey and Argentina are going through currency declines. The path toward Brexit remains controversial and confusing. China, the U.S. and EU seemed destined for major trade conflicts.

Meanwhile, the U.S. dollar is strong — serving as a strong source of hedging for concerns all across the world.

Strategy And Discipline

What are anxious corporate treasurers and cash managers to do?

The first step seems obvious, but not obvious enough that it should escape mention. “The primary strategy is to have a strategy,” he said, “rather than hope the exchange rates move in your favor.”

That means identifying the exposure points in your business and “figuring out how to offset those risks and remove volatility from the equation,” Schamotta said.

Not all volatility is bad, as properly prepared global business already know. A strategy combined with the tools and discipline to execute it over a period of time — software that automatically responds to market triggers, for instance, or an institutional willingness to stomach day-to-day declines in favor of longer-term gains — can lead to volatility-enabled rewards.

And technology combined with discipline to prevent short-term losses and panic. Setting “trigger levels” via software, and sticking with them, means “you don’t have to worry about flash crashes,” he said. “If anything, you can benefit from them.”

That’s not all. Smart, sophisticated hedging can support expansion plans that involve building factories or offices in foreign countries, or retail and wholesale programs that involve pricing in local currencies.

Noise And Signal

A big part of all that is “separating the noise from the signal,” Schamotta said.

That includes avoiding assumptions that everything is moving toward ruin. “The fundamental of the global economy remain favorable,” he said, adding that global trade and U.S. consumer spending are two areas of notable health. Business confidence is high. While things may worsen, for now, “the opportunities are enormous.”

Getting past the noise also requires a diversity of thought — which means consuming various sources of news and information, as that helps cancel out the various biases and general tone of negativity found in media outlets.

Opportunity rewards the bold. But being bold often turns out as expensive, wasteful theater if not based on a firm strategy and supported by discipline. There seems little chance that stability will return to the global economy anytime soon. That’s why risk management is becoming more important to more types of companies.


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